When managers evaluate potential new businesses, it’s one of the first questions they ask: How fast is the market growing? By focusing only on growth, however, companies often overlook another critical measure of market potential—the turnover of the customer base. High turnover can make a market dynamic even when the overall growth rate is low.
Consider the market for smoking-cessation aids, which hasn’t grown at all over the last ten years. During that same time period, though, the market shares of the leading brands, Nicorette and NicoDerm, were cut almost in half by the brands of Walgreen, CVS, Wal-Mart, and others. Compare this with the market for cigarettes. Although growth was equally flat during that time period, the market share of leaders such as Marlboro and Camel hardly changed, and no new brands, including private-label brands, gained a foothold.
Why the difference? Customers of smoking-cessation aids turn over quickly—they either quit smoking or take up the habit again. In the cigarette market, by contrast, most customers stay put, and this low turnover protects incumbents.
The same concept applies to fast-growing industries. Case in point: Nintendo’s position in the video game industry seemed unassailable in the mid-1990s, but Sony saw an opportunity as teenage players transitioned into adulthood. By 1999, Sony’s PlayStation had transformed the industry and dethroned Nintendo. The tables turned again when Nintendo’s Wii overtook Sony’s franchise through a combination of innovative game play—targeted in part at families—and low pricing.
The bottom line: In high-turnover markets, customer loyalty is less meaningful, which can put market leaders at risk.