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Are Printer Companies Chasing the Wrong Target?
Recently,
Lexmark International released information indicating that the firm is
basing a significant portion of Executive bonuses on market share.
While growing market share intuitively appears to be the right goal in
this business where each unit placed drives highly profitable supplies
revenues, this strategy may actually drive lower profits!One of
the very subtle, but also very important aspects of the imaging
industry is that not all customers are created equal. An ink jet
printer placed in the consumer’s home for use as a personal printer may
print as little as 50 pages per month. However, a workgroup laser
printer with multi-function capabilities (fax, copy, or scan) which is
connected to an office network can print as many as 10,000 or more
pages a month. As a result, the multifunction laser printer can be as
much as 100 times more profitable than the inkjet printer. And when the
comparison is to color workgroup printers, or very high performance
printers used in print shops (such as Xerox’s DocuColor line), the
comparison can be even more dramatic.So a company that is able
to chase more profitable footprints will ultimately be more profitable
than the company chasing less profitable footprints, even if it ends up
with a smaller market share. So, in short, our premise is market share
is not equal to profitability. Our point can be proven by the two
graphs listed below. The first graph shows unit share for laser
printers, MFPs, copiers, and ink jet printers. HP is the unit share
leader, followed by Canon , Epson and Lexmark. However, when one looks
at the the same firm’s share of industry operating income , the story
changes considerably. Suddenly, Canon is the number one firm in terms
of share of operating income, followed by HP, Ricoh and Xerox .
Lexmark – the number four firm in terms of market share, comes in a
distant seventh in terms of operating income market share. Conversely,
Ricoh, one of the firms with the least market share comes in as number
three in terms of operating income share.Another way to
evaluate this is to look at the difference between each firm’s market
share and their operating income by subtracting market share from share
of operating income . If a firm has greater operating income than
market share, then they must be doing a better job of capturing the
‘more profitable’ customers and this equation will have a positive
result. Conversely, if they capture less operating income than market
share, they are capturing more of the less profitable customers and the
equation will have a negative result. Based on this analysis, the table
below how five firms, Canon, Ricoh, Xerox, Konica Minolta and Kyocera
Mita are gathering the most profitable customers.While we have
identified Lexmark as one of the firms incentivizing executives to
chase market share, they clearly are not the only firm which is
targeting the wrong metric. Unfortunately, many firms (including firms
outside the imaging industry) chase customers who are not profitable
for the sake of gaining ‘market share. However, the smart investor will
find those firms that are focused on capturing profitable customers and
growing ‘profit’ share versus market share.
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