Introduction

Revenue growth is an economic imperative for all businesses. However, management often fail to use forecasting science for setting growth objectives, instead basing targets on intuition and negotiation. It is important to develop an evidence-based understanding of the realistic bounds and likely sources of growth.

Aside from buying other firms/brands there are two ways to grow:

• Share Growth – which is achieved through gaining market share from competitors,
• Category Growth – which is the market revenue growth of the segments that the firm’s brands compete in.

Either could lead to sales revenue increases, and the interplay of the two may have different strategic implications. For example, competing for share increases in a growing category is likely to draw a less aggressive response from rivals than if the category were declining. Focusing solely on share gain as an objective without a proper knowledge of the category may put the firm at a long-term disadvantage. For instance, a strategy of increasing price promotions to gain share, may destroy the category profitability.

The first aim of our study was to empirically document the relative contribution of share and category growth towards overall firm revenue growth.

Do big and small firms grow differently?

Can big firms grow faster because they benefit from greater organisational resources? Or perhaps smaller firms can be more agile in exploiting opportunities.

Evidence from previous studies about potential links between firm size and growth rates have been contradictory. This lack of a clear relationship between firm size and growth rate can be due to not accounting for the differing growth rates of the markets or categories the firms compete in. If firms of similar size invest in categories growing and declining at different rates, then overall firm growth rates cannot be expected to be similar.

Another aspect that has been ignored in the previous studies is whether firms of different sizes achieve growth in different ways (i.e., category vs share growth). All competing firms in a segment will experience the same rate of category growth. But if certain firms are better able to also attain growth through share, they can achieve higher overall revenue growth.

The second aim of our study was to investigate whether overall revenue growth rates and the elements of that growth (share and category) as associated with firm size.

Method

This Institute research is based on 39 CPG product categories from the UK and US markets, comprising 189 manufacturers over three to five years (from retail scanner data, post-2010). Manufacturers are considered distinct within each product category due to varying firm performance in terms of market share across different categories. This is also in line with business practice, with possibly different divisions or business units managing the brands in each product category.

Results

The analysis of the individual firms’ year-on-year data reveals the diminishing possibility of revenue growth, i.e., large share firms are less able to experience large percentage changes in revenue, but they are also less likely to experience large losses. The smallest firms (<10% share) are those that experience large swings in market share, relative to size, which can be seen through a wide range of values (-40% to 102%) – as shown in Figure 1.

Figure 1: Year-on-Year Share Growth and Decline by Firm Size

In contrast, the growth rates of the largest firms (50%+) were all within a smaller range (-5.9% to 5.7%). Therefore, while the assumption of market stationarity broadly holds for larger firms, considerable volatility is experienced among the smaller firms. It’s not surprising that it is difficult for large firms to achieve high growth organically, which gives a reason for acquiring smaller firms. When revenue growth rates are plotted against initial market share, there is a funnel-shaped distribution with higher variance for small firms that tapers to a narrow band of growth for bigger firms. It can be seen from Figure 2 that revenue growth is still possible for large firms due to the effects of category growth.

Figure 2: Year-on-Year Revenue Growth and Decline by Firm Size

Across the data, on average the categories grew marginally by 1.1% (Median: 1.2%; Range: -9.1% to 10%). This constrains firm growth, particularly for firms with high market share.

Hence, large revenue growth rates relative to category growth are possible for small firms but are less likely to occur for large firms. For large firms, net growth is more likely to occur when the whole category grows. The large firms are more reliant on category growth due to their near-stationarity in market share (Figure 1). This pattern is also clearer when we apportion by firm size the percentage of revenue growth or decline attributable to category or share growth as shown in Figure 3.

Figure 3: Change Attributed to Category vs Share Change

This pattern is also apparent when we split the sample between firms that grew by 2% over one (n= 191) and two years (n=79) against and those that declined by the same percentage across the total sample (one year n = 178; two years n = 84). The results show that the growth or decline over one and two years for larger firms (especially those with 40% market share or bigger) is more likely to be influenced by category movement. Large firms with 50% market share are particularly reliant on category growth to grow their business – and also more susceptible to changes when the category declines.

Conclusion

Our findings provide empirical support for those engaged in the business of setting annual growth objectives, particularly those targeting year-on-year market share and sales increases. The evidence shows a complex but regular relationship between firm size and the relative rate of change in the two possible sources of revenue growth attributable to that change.

Large firms (and brands) demonstrate relative stationarity in market share, and we measured the extent to which they are then more reliant on category growth for revenue increases. For the largest firms, category growth contributes between a half and two thirds of any change. Small firms are able to achieve far higher relative rates of revenue change, partly because they can also achieve market share gains more easily. For small firms, over half of any revenue change can be attributed to gains in share. However, the evidence in the regularity of the funnel shaped distribution shows the volatility of these changes for smaller firms: that large year-on-year increases in share and revenue are highly likely to be followed only by decline.

Marketing management is usually tasked with setting growth objectives, and apportioning budget to achieve them. Without knowing these growth norms, or considering the implications of the role of firm size, the continuing practice of gut-feel objective setting is unlikely to deliver attainable and realistic goals. For managers, these findings inform evidence-based decisions that help to avoid habitual, mechanistic or intuitive goals.

They demonstrate the need for firms to understand when to implement strategies to grow categories, as opposed to gaining share. For big firms, the most likely growth strategy to adopt is to enlarge the whole market – by attracting more buyers and/or extracting higher value from their consumption. This knowledge should then guide firms – and specifically marketing – in driving growth in the business. At the wider larger firm-level, the importance of category growth should also guide portfolio decisions on which categories to invest in for revenue increase.