Route to a brand's best strategy: new findings challenge the belief that market share alone correlates with profitability. Bain & Company's analysis of 200 brands shows that products at the high end stand to earn considerably more with a smaller share of the overall product category.(Sounding Board)

Conventional wisdom holds that market share alone determines profitability for branded consumer products. But that masks the full story. Consider what happened to The Gillette Co. after its main competitor Bic introduced low-cost disposable razors sold by the bag in the mid-1970s. Gillette, the global leader in razors, responded with its own razors in bags.

Yet Gillette's brand managers soon realised that even if they maintained a majority share in a value-oriented category, pre-tax operating profit, or return on sales (ROS) would be restricted to only 5-10 per cent. They looked for another road to profitability. Gillette invested more than $200m in research and development, culminating in the 1989 introduction of its Sensor razor. The Sensor sold at a 25 per cent price premium over its own Atra, which until then had been the highest-priced shaving system on the market and it sold well.

Gillette's innovation convinced consumers to pay a premium for a new set of shaving expectations. Consumers proved willing to spend $3.75 for a shaving system that required 70-cent replacement cartridges, while there was an option elsewhere in the market to settle for 40-cent razors. What's more, 15 per cent of Sensor's new sales came from consumers who had bought competitors' disposable razors. The Sensor and its succeeding products returned the razor to a high-end category.

Gillette had decided that making the entire wet-shaving category more premium was more important than just getting back its market share in a category that was becoming a commodity. The lesson is that market share indeed affects profits but market share alone does not strictly correlate with profitability. When Bain & Co. studied the profitability of brands in more than 200 categories of global consumer goods, we found that market share explains only about half of the differences in brands' profitability.

A brand's profit potential is swayed by both market share and the nature of the category in which the brand competes. In Europe, premium brands are those that command at least a 25 per cent to 30 per cent higher price than value brands or private-label counterparts. Premium categories are those in which more than 60 per cent of the volume sold is premium brands.

These findings hold implications for consumer goods organisations and brand managers. They affect not just individual…