Tuesday, September 7, 2010

Growing Your Market Share

Toys R Us has opened an Express store in our mall.

They already have a full service store in our other mall (2 miles away). They are hoping to grow their Market Share with this pop-up store (here today, gone December 26th).

Calculating Market Potential
Do you know your Market Share? Here is an easy way to find out.
  1. Find the total dollars spent in the US in your industry for 2009 (toys = $21.5 billion)
  2. Divide that by the population of the US (308.5 million)
  3. Multiply that number ($69.69) times your market's population
The answer is your Market Potential - how much total business is done in your industry in your market. Divide your Gross Sales by the Market Potential and you'll have your Market Share.

Knowing this makes a huge difference in how you go about your business.

How Many Customers Equals Growth?
If you have a relatively small market share (less than 5%), it doesn't take a whole lot of new customers to grow your business. Just convincing 1% of the market to switch to you gives you 20% growth! Wouldn't that knowledge change the way you advertise?

Knowing how to do this calculation also helps you see the trend in your market. Is it growing or shrinking?

In the case of toys, it is shrinking. Back in 2004 the sales per person was $75.17. In 2009 it was only $69.69. Plus, in my case, the population is shrinking, too. My market potential has dropped almost 10% in the past 6 years (not adjusted for inflation which makes it even worse) because we have a shrinking toy industry and a shrinking population base - double whammy.

So just to keep sales equal to last year I need to steal business from my competitors and grow my market share. That's a hard task for any retailer, and part of the reason why Toys R Us is opening a second location in a small market. They are trying anything they can to grow their market share.

Market Share at What Expense?
But before you say, "Hey, what a great idea. I'm going to open a pop-up store!" you need to understand the ramifications of their actions. Yes, they will probably gain some market share. The mall in which they put the pop-up is next to a Wal-Mart, but doesn't have any other toy retailers.

But the costs will be extensive. They will have rent and payroll at the new place on top of the rent and payroll at the main store. And the two stores are so close that a large portion of their sales in the new location will be lost sales at the main spot. In effect, the biggest market share they will steal is from themselves.

Pros and Cons of the Pop-up Model
If you are thinking about a pop-up store you have to weigh the pros and cons.
The pros:
  • Only paying rent for the busiest months of the year when sales are enough to pay those bills.
  • Getting exposure and sales in new geographic areas
  • Having built-in traffic (mall-generated) instead of having to advertise
The cons:
  • Increased rent and payroll (decreased profit?)
  • Increased headache of keeping inventory straight and stocked between two locations
  • Potential of cannibalizing your own market share
  • Could damage brand reputation with smaller selection, less-trained staff
Only you can weigh those options and know if it is the right decision for you. But if your market potential is shrinking, it might be the best way to grow your share of that shrinking pie. My guess is Toys R Us doesn't care as much about expenses and profit as they do market share - a number they know all too well. That's the number that makes headlines for them.

When you know your Market Share you are better prepared to make those decisions.

-Phil

PS In the next post I'll tell you my plans for dealing with our shrinking Market Potential.

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