The dilemma of Profits or Share
Posted September 10, 2011on:
Consider a firm that wishes to increase current year profits p, as well as market share m. As shown in the figure, for some values of m profits increase, and then it starts to decrease beyond a point. Beyond a point increased market share comes only with reduced current year profits because of increase expenditures on advertising, R&D, price reductions, and other promotions and marketing activities. Thus, telling a manager to maximize current year profits, market share, future growth in profits will make the manager wonder “what should I do?”
Though the assumption is that if get more people to use or get people to use more number of times (increase in market share), we can reap profits in future. It doesn’t work so simply on the ground as people might very well stop buying you the moment you stop investing or shouting.
The decision to increase revenues either by investing in gaining more share or trying to extract additional profit is very crucial and itdepends upon the Brand Managers and the Marketing Managers. As said, though we all theoretically know that this is where we have to stop and this is how we have to optimize, it is extremely difficult on ground to understand whether the brand has future potential to grow from the consumers or is it the maximum?