Sometimes you notice that companies are desperate for customers. The competing firms woo, almost bribe the customers in order to get their business. If you’re a student, you’ll notice that banks are pretty keen to get you to open an account with them. Now why do companies sometimes buy market share that way? I was trying to work it out, and I think there are the good cases, the bad cases and the ugly cases.
The good cases like banks and students are cases where companies realise that once you've got the person, you’ve probably got them for life. So it’s worth buying market share because your upfront investment will be paid back over many years. It’s like building a new factory. You know, you pay out money now, but you’re going to get returns down the line. Those are the good cases. Another example would be Sky TV. If you've got competing satellite providers, well you want to be the one that really gets out there, gets people to install your dish because once they’ve installed your dish, they’re your customer and they’re not going to switch. So getting the market now means you’ve secured it for later.
The bad cases are where companies make a mistake. They think they’re doing that, but actually the customers are just going to change their mind. So if you take the banks, it’s worth getting students. They’re young, and most of them are probably going to stick with you for many years, but if you’re an energy company and you get me to switch my account to you by offering very low prices, for example, or upfront discounts, well you’ll get me, but as soon as those discounts finish, I’ll be off, I’ll be with the next company for their special offer – bribing promiscuous customers who are not going to stick with you, absolute waste of time. Those are the bad cases of companies wasting their effort, wasting their money on bribing consumers.
The ugly cases, well those are the ones where it makes no economic sense for a company to go out and buy market share, but boy it makes the chief executive feel good, makes him feel or her feel that their company is bigger, dynamic, growing, set on the right path, and all they’re really doing is spending their shareholders’ money on self-aggrandisement. Those are the cases that I suspect dominate quite a lot of the companies that do in fact buy market share, that’s my suspicion, and those are the cases of which one should be really, really sceptical.
That’s my opinion. You can join the debate with The Open University.