Who is a market leader?
The firm with the highest market share in a particular market is called the market leader.
In general, market leaders are the largest companies in the industry. Those firms with large market shares have considerable strengths such as famous brands, price-setting power, loyal customers and outstanding financial abilities.
There is also a relationship between having high market share and profitability of the business.
When it comes to the firm’s product portfolio, the product with the highest market share is called the ‘brand leader’.
Benefits for the market leader
Market leaders have the following benefits – resulting from having a high market share – and they include:
1. PRODUCT:
- Well-established product portfolio. Market leaders offer a range of popular products that are highly enjoyed by majority of the customers on the market. These best-selling products often last decades generating robust sales for the company. Just think about the Big Mac hamburger from McDonald’s, PlayStation from Sony or different models of Audi cars.
- Easier to introduce new products. Retailers are keen to stock and sell popular products as they will be bringing in more customers to their shops. These products will be given the most prominent display position in the shop to make it easier for customers to find.
- Advanced Research & Development. To remain on top, market leaders must continuously invent new products and improve existing ones in order to be better than competition.
2. PRICE:
- High pricing power. The power to set higher prices giving the customers no choice but to keep on buying the product will boost sales revenue, hence increase profits.
- Predatory pricing. Market leaders often engage in predatory pricing to outsell the competitors. They have the power to set very low prices and survive making temporary loss in order to get rid of the competition and deal with new companies that enter the market.
- Abilities to gain economies of scale. Leading companies in each industry are typically large businesses. Thanks to their size, they are able to gain a range of internal economies of scale – the larger the business is, the lower the cost of product it can achieve (up to a certain point). Lowering Average Cost of Production (ACP) will enable to firm to increase its profits without spending more resources on promotion.
- Potential for higher net profits. Due to higher sales resulting from having a large number of customers, this could lead to higher overall profits for the year. Higher net profits can be used to pay more dividends to shareholders or retain more capital for future growth.
3. PROMOTION:
- High status and prestige. Market leaders gain recognition and respect from the general society as customers enjoy buying from the most popular brands. People want to feel the best and they are willing to tell others about their new purchases, especially family members and friends.
- Lower spending on promotion. Thanks to strong branding, market leaders have high brand awareness and brand recognition therefore there is no need for them to promote that much as many people already know the brand and its products very well.
4. PLACE / DISTRIBUTION:
- Highest distribution level. Wholesalers and retailers prefer to trade with dominant market players to get access to top-selling products. Therefore, it is easier to reach out to new markets or open up new sales outlets.
- Lower discount terms to retail. Retail shops are usually keen on stocking the best-selling products from the market leaders due to demand for popular products. That is why the producers of leading brands might supply retailers offering them a much lower discount rate, for example only 5% off.
Remember that the firm with the largest market share is not necessarily the most profitable one. While having high market share brings many benefits to the business, staying on top as the dominant industry player is neither given nor guaranteed.
