Why is Large Market Share Important?
Why is Large Market Share Important?
Why is Large Market Share Important?
Market share a definition
First, let's start with what we mean by "market share". Market share is essentially the percentage of business your company does relative to the entire business segment. More simply illustrated, if your business manages 350 patients in a single or five county service area and the total number of patients under care in that same single or five county service area is 1000, then you have a market share of 35%.
Seems simple. But what exactly does your market share represent to your business? And, what does it mean if your market share is 35%, 45%, or 50%? Are there compelling reasons as to why you would want to see your market share at 50%, 60% or more? We know that the larger your market share is for your service business, the better service business you will have. What follows are the top three reasons why larger market share is important to the overall success of your home health or hospice business.
Market share drives the market's perception of your service, and the market's perception of your business is a prerequisite for growth. Your market share affects the market's perception of you, and, at the end of the day, it is what people think of your business that drives them to either do business with you or with someone else. Whether you are looking to attract customers or employees, what those potential customers or potential employees think of your business will affect what choice they make about doing business with you.
Why is this? If you have a low or falling market share, potential customers and/or employees may believe that there is something inherently wrong with your business. If you have a high or growing market share, potential customers and/or employees will most likely believe that your business is strong and one they want to be a part of.
For home health and hospice businesses, the larger your market share, the better perception the market has of your business.
Let's face it, most home health and hospice business comes from professional referrals. If the referral is not a good one, the professional has put her/his reputation at risk. Larger home health and hospice businesses, based on their size alone, are typically more capable of providing better services since larger firms can typically make adjustments for influxes in patients.
And you can bet that the level of service a patient receives gets communicated back to the professional that referred them. This, in turn, begets even more referrals for the same home health or hospice business. We now have what we consider a "snowball" effect. Good perception leads to referrals, which in turns leads to more patients and growth of the business to support the increase in patients.
The same is also true for a home health or hospice business' ability to attract capable staff. Nursing and physical therapist shortages are prevalent. Larger home health and hospice businesses with better reputations attract the sought-after staff more easily than businesses with reputations that are not as sound.
Market share drives profitability
Market share and profitability are strongly related. The PIMS (Profit Impact of Market strategy study is an annual study conducted by the Strategic Planning Institute for the specific purpose of determining how key dimensions of strategy affect profitability and growth. One of the study's key findings is that business units with very large market shares enjoy rates of return more than three times greater than small-share business units mainly due to the economies of scale that larger businesses experience. More specifically, when comparing firms with less than 7% market share to those with 38% or more, it was found that ROI for those with the larger share was 33% compared to 10% for the smaller. (1)
A greater market share directly impacts home health and hospice business' profitability.
Since home health and hospice businesses are typically geographically situated, a higher geographic concentration (greater market share) leads to greater profitability. Home health and hospice businesses with large market share experience:
Lower costs for seeing patients. A greater concentration of patients in a service area requires less travel time for staff to see patients thus enabling staff to see more patients in any given day.
Lower overhead costs. Supervisory staff can cover ten nurses in a concentrated service area versus fewer nurses in a less concentrated service area.
Reduced medical equipment and supplies costs. With centralized medical equipment and supplies businesses you can command better pricing since you are a larger part of their overall customer base.
Market share drives business strategy.
If you understand where your business is relative to the market, you'll use this knowledge when making your business decisions around marketing, sales, operational management, acquisitions, and more. By knowing your market share and knowing your competitors' market share, you can better predict your ability to grow.
For home health and hospice businesses, you need to define where you can have the greatest market share.
Research on market share tells us that if you are not the #1 or #2 business in a market, you need to be. As we've illustrated above, the larger your market share the more profitable and successful your business will be.
You may look at the overall market in your centralized area, and relative to your competitors, you might be in the #3, #4 or #5 market share position for the overall market. But, is there what we typically refer to as a "segment" or a "slice" of that overall market in which you can be the #1?
For home health and hospice businesses, market share can be looked at by the types of patients being serviced and by the services available in a market. And, there may be an opportunity for your business to be the #1 business in that specific segment, allowing you to enjoy all the benefits of being a large market share business. Be careful, though, what segment you target. Targeting less profitable types of patients (LUPA, B-12 and wound care for example) may erode the profitability of your business even if you have the #1 market share in that particular segment.
We hope that you now understand just how critical it is to know your business' market share and for how critical it is to be a large market share business. For the home health and hospice market, knowing how to measure market share can often be complicated, but we'll delve into the key methods for measuring your market share in our next newsletter.
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