So, what can this Italian, who lived from 1564 to 1642, do for your business?
Answer, around 1590 Galileo said,
“Measure what can be measured and make measurable what cannot be measured.”
Business is complex. At a rough glance there are around 30 different aspects to your enterprise that are common to all business. Obviously, there are variations from industry to industry, but the fundamentals remain the same. Acquire as many customers, as economically you can, sell as much to them as you can and keep them for as long as you can.
The big task is;
- Identifying and listing the aspects of business
- Understanding all of them in depth
- Learning how to deal with them simply
This can be a daunting task and it’s hard to know where to start. But like eating an elephant, let us take one bite at a time.
Market Share is one of the most valuable measures for assessing the value of your company. In this one percentage, you can identify the success your company has had in capturing share of customer expenditure and the likely influence the company has on the shape of the overall market. If you combine this percentage with a growth rate, then you can also assess whether your company’s competitive position is improving or declining.
We all want more business. More business means more market share. How do you know current market share? How do you calculate it? And most importantly, how do you go about increasing market share?
The key to growing a successful business is to take actions that reduce any barriers that limit your market share. To help, I have turned to a very elegant methodology called Product, Presence and Hit Rate (PPH®). Or Market Share Management Using PPH®.
PPH® was developed by Frank Lynn & Associates, Inc. (FL&A), a Chicago based consultancy. While they were working with a major manufacturer in the USA, they were looking for a simple methodology that would allow them to focus on three key aspects of market share. During this process they developed PPH®.
Initially everything is estimated. If you have 100% Product Coverage X 100% Presence to the Market X 100% Hit Rate, then you will have 100% of the market. But, we all know that’s Utopia. Typically, product coverage will range from 75% – 90%. Everyone loves finding, developing and refining products. It’s fun and you can spend decades on it! Market presence, now that is harder. A manufacturer’s presence to the market can vary wildly with typical ranges from 10% to 70% market presence. Then we come to Hit Rate. This is where we all kid ourselves! Most of us think we are better than we are and will say we have anything from 30% to 100% Hit Rate. We all know that’s not possible in a competitive market. In reality, again in a competitive market, if your hit rate is above 40% to 50%, your prices are too low. To look at it another way, you will never know your price ceiling until you lose an order. And for a salesperson, to lose an order, is an experience worse than death.
So, back to Galileo and as an example, let’s look at your business measurements.
Your calculation will probably look like this;
Product 80% X Presence 40% X Hit Rate 40% = 12.8% Market Share.
THE BIG QUESTION FOR YOU: IS THIS THE MARKET SHARE YOU THOUGHT YOU HAD?
If your answer is Yes, then you need to do more work on your market presence as your product has little room for improvement and as we said earlier, if your Hit Rate is over 40% then you need to look at your pricing.
If your answer is No, then you have some work to do. In fact, Galileo’s second part to his quote, “make measurable what cannot be measured” fits well into the process of PPH®.
You more than likely have done a bottom up calculation of your market. You know your competitors, have an estimate of their revenue but most importantly, do you know the size and potential of your customers? You will have a good “feel” for how big the market is but are your numbers accurate? Are there aspects of the market that you may have overlooked? With the new buzz word “disruption” is there a different approach to an existing market?
Once you have a number, a view of the market shape and understand the full complexity of your market, you can move on to Presence or your path to market.
Presence is often achieved through three forms. 1. Salespeople knocking on doors. 2. Partners such as retail outlets or distribution. 3. Direct through TV, telemarketing, catalogues or internet. Again, there is a lot of work to be done in this area to understand the channels to market, what their demands are and how you manage them.
After Presence we move to Hit Rate and where we all have to stop kidding ourselves. The hardest question any salesperson must ask themselves, when they look at their sales pipeline, is, what is “real vs. what is just tire kicking?” Again, there is a simple methodology around valuing your pipeline to determine your true Hit Rate. Once you have determined that then you look at how to improve your hit rate.
Back to Galileo and business measurement. I have touched on three things;
- The necessity for measurement in your business.
- Complexity can be broken down to major aspects that have three key points.
- Expanded on these three key points with PPH® example.
I have used FL&A’s PPH® methodology with success repeatedly over the years – first as a client and then as a consultant to other manufacturers. I would be happy to discuss how PPH® can help you to determine what is limiting your market share and how to improve it.
(Contribution by William Gill, a FL&A Associate in Australia. Contact William at firstname.lastname@example.org)