Market Share vs. Addressable Market – Impact on Value

Imagine you’re a farmer and you’ve been tending to your crops all year. It’s harvest season and finally time to collect the spoils of your labor.

You start harvesting your crops only to find out that pesky rodents have been quietly eating away at your fields. You’re devastated as you come to the realization that much of what you have been working so hard to cultivate has already been taken.

Feeling like there is not much field left to harvest is what acquirers and investors are trying to avoid as they evaluate buying your business. Metaphorically speaking, acquirers want to know that if they buy your business, there will be plenty of fresh farmland left for them to till. 

Addressable Market

Investors call it your company’s “addressable market” and it is one of the main factors buyers will look at when they evaluate the potential of acquiring your company.

Business 101 tells us we should strive for market share so we can control pricing. Market share is a worthy goal if your objective is to maximize your profits. However, if your primary objective is to increase the value of your company, you want to be able to communicate that you have relatively low market share across the entire addressable market. In other words, there is plenty of field left to plow.

Consider the following ways you might expand the way you are currently thinking about the addressable market for what you sell:

Demographics

Demographics involve segmenting a market by objective measures like gender, income, age and education level. Marriott is a hotel chain but they have created a variety of brands to address the various demographic segments they want to serve. Ritz Carlton is a Marriott brand that appeals to affluent travelers, but if all you want is a basic room, you could opt for a Courtyard Marriott. It’s the same company, but they have expanded their addressable market by focusing on different demographic segments.

Psychographics

Psychographics involve segmenting your market according to the way people think. Toyota produces the Prius, which gets 50 miles per gallon and is a favorite among environmentalists. Toyota also produces the thirsty Tundra pickup truck and, at just 15 miles per gallon, attracts a different psychographic segment.

Geography

Success in your local market is good but if you want to really boost the value of your company in the eyes of an acquirer, you need to demonstrate that your concept crosses geographic lines. McDonald’s has more than fourteen thousand locations in the United States but they have also demonstrated that the golden arches can draw a crowd in other markets. McDonald’s has nearly three thousand stores in Japan, two thousand in China and more than a thousand locations in each of the European countries of Germany, Canada, France and the United Kingdom.

You don’t actually have to become a global giant like Marriott, Toyota or McDonald’s to increase your company’s value but you do need to be able to communicate that your concept could work in other markets and that there is still good land left to plow.

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Will this be the year you seriously drive up the value of your company?

If you have resolved to make your company more valuable in 2017, you may want to think hard about how your customers pay.

If you have a transaction business model where customers pay once for what they buy, expect your company’s value to be a single-digit multiple of your Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA).

If you have a recurring revenue model, by contrast, where customers subscribe and pay on an ongoing basis, you can expect your valuation to be a multiple of your revenue.

Buyers pay up for companies with recurring revenue because they can clearly see how your company will make money long after you hit the exit.

Not sure how to create recurring revenue? Here are five models to consider:

Products That Run Out

If you have a product that people run out of, consider offering it on subscription. The retailing giant Target sells subscriptions to diapers for busy parents who don’t have the time (or interest) in running to the store to re-stock on Pampers. Dollar Shave Club, which was recently acquired by Unilever for five times revenue, sells razor blades on subscription. The Honest Company sells dish detergent and safe household cleaning products to environmentally conscious consumers and more than 80% of their sales come from subscriptions.

Membership Websites

If you’re a consultant and offer specialized advice, consider whether customers might pay access to a premium membership website where you offer your know-how to subscribers only. Today there are membership websites for people who want to know about anything from Search Engine Marketing to running a restaurant.

Services Contracts

If you bill by the hour or the project, consider moving to a fixed monthly fee for your service. That’s what the marketing agency GoBrandGo! has done to steady cash flow and create a more predictable service business.

Piggyback Services

Ask yourself what your “one-off” customers buy after they buy what you sell. For example, if you make a company a new website, chances are they are going to need somewhere to host their site. While your initial website design may be a one-off service, you could offer to host it for your customer on subscription. If you offer interior design, chances are your customers are going to want to keep their home looking like the day you presented your design, so they might be in the market for a regular cleaning service.

Rentals

If you offer something expensive that customers only need occasionally, consider renting access to it for those who subscribe. ZipCar subscribers can have access to a car when they need it without forking over the cash to buy a hunk of steel. WeWork subscribers can have access to the company’s co-working space without buying a building or committing to a long-term lease.

You don’t have to be a software company to create customers who pay you automatically each month. There is simply no faster way to improve the value of your business this year than to add some recurring revenue.

So are you ready to drive up the value of your business?  Take this 13-minute assessment to learn where to focus your efforts on driving value.

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