InCite

As college semesters begin across North America, and stores pass through the annual season of rush, it is important to remember that this semester will be different than prior semesters. It will be different because of how stores chose to respond or not respond to changing demographics, changing competitors and competitive tactics, changing political pressures, changing technologies, and a changing world. The dirty secret many of us know, but few dare voice, is that the industry is losing market share. If you let only one thing keep you up at night during rush (other than rush itself), then let it be these two questions: (a) where do I stand on market share for textbooks across all formats and business models, and (b) how will I retain or improve my market share position?

History and Market Share
As Winston Churchill noted, "Those that fail to learn from history, are doomed to repeat it." Consider the case of Western Union. The company dominated the communications market in the 1800s. Toward the end of that century the company had an opportunity to capture the market for a radical new communication technology, but declined the opportunity because, as they recorded in an internal memo, “This telephone has too many shortcomings to be considered seriously as a means of communication. This device is inherently of no value to us.” A small startup called AT&T decided that the device had promise, built market share, and the rest is history. We see similar stories unfold again and again over history—for example, horses and horse drawn vehicles were the primary means of transportation for centuries prior to trains, and trains were mostly usurped by planes and automobiles. Candles, payphones, and music stores all mostly disappeared as the primary mechanisms for their originally intended purpose—and eventually we will see this occur with print textbooks too. The question is whether those of us who sell print textbooks will choose to participate in future course material markets.

Research extending back to the 1960s consistently demonstrates that relative market share is one of the most important factors affecting organizational profitability. Larger market share typically produces economies of scale in purchasing and utilization of fixed assets. In building market share a company takes its competitor’s customers and makes them its own. As market share weakens, so does bargaining power, and margins. In some sense, market share is one of the most important measures of an organization’s or a channel’s health and viability. Market share retention, if not growth, is a fundamental component of business strategy. This is particularly true with the introduction of new technologies—where the “winner” in the end is not necessarily the company or channel with the best technological solution, but the one who was able to capture the majority of market share.

Over the past decade college stores have lost, conservatively, more than 10 points of market share for textbooks. Stores choosing not to sell their textbooks online have easily lost more than double that figure. That loss has primarily gone to new competitors, such as Amazon and publisher-direct options, or to students choosing not to buy the content due to affordability factors. Indeed, many stores failed to recognize lost market share because price increases from publishers hid the real losses. Many stores continue not to seek market share in the digital and online space, effectively forcing publishers and students to go around the college store as an option, and sacrificing market share. New competitors are anticipating change and going to where the customer will be in the future. They are building market share in those spaces while much of the traditional collegiate retail channel fights for maintaining historical margins. How much business can stores give away, before there is no viable business remaining? How much can an institution do without a store’s financial support?

That yields a net revenue R_n = $1.6B for the industry. If MS drops by 10 points (MS₁) or 20 points (MS₂) that has the following impact, assuming margins remain constant:

MS₁ = 60% which implies R_g1 = $4.6B, R_n1 = 1.4B, or a $200M decrease in net revenue to the industry.
MS₂ = 50% which implies R_g1 = $3.8B, R_n1 = 1.2B, or a $400M decrease in net revenue to the industry.

This yields an initial R_n = $323k for textbooks for our sample store. If we then see a drop in MS of 10 points (MS_a) or 20 points (MS_b) that has the following impact, assuming margins remain constant:

MS_a = 60% which implies R_ga = $1.2M, R_na = $277k, or a $46k decrease in net revenue to the store.
MS_b = 50% which implies R_gb = $1.0M, R_nb = $231k, or a $92k decrease in net revenue to the store.

The market share and margin analysis above is based on gross margin dollars and the effects of reduced sales. Both of these are top line issues. However, another decrease of 20 percent market share in our industry will be catastrophic because of low net margins and a high percentage of fixed operating costs. Both of those are bottom line issues. A 20 percent loss in market share could effectively wipe out all store operating surpluses and put stores in the red, unless fundamental changes occur in store management and operating structures. Administrations may tolerate reduced revenues but are unlikely to tolerate a reduction or a loss in net income unless they can be convinced that after a brief time of transition losses will cease. Thus, an extended implication of lost market share for college stores is that stores may lose more than just top- or bottom-line sales, they might also face the prospect of losing control of their operations.

Is All Market Share Equal?
When competitors take a piece of the textbook market share away from stores, or students choose not to buy due to affordability, the lost market share occurs not just in the textbook business, but also to the store’s other lines of business as well. One of the larger stores engaged in data analytics and permission marketing found that the students who buy most of the non-textbook items are the same students who buy the textbook items. The conclusion they have drawn from their data is that if you do not sell textbooks, you do not sell anything else. Thus, a 10 point drop in market share for textbooks, will cause R_g for non-textbooks sales to drop as well. Thus, stores must pay attention to market share.

When students buy textbooks online, or competitors attempt to take a portion of college store market share, which portion of market share are they likely to tackle first: large adoption courses, or esoteric adoptions for high-level courses with low enrollment? Odds are, they are looking to capture market share from the 50 to 200 largest adoptions, because those books will yield the greatest amount of revenue and the best economies of scale in the shortest amount of time. By aggressively pursuing market share among large adoptions competitors can have the greatest visibility, and the greatest impact, on the bottom line of stores and set themselves up to more easily take lower volume adoptions in the future.

And What About Technology?
Like Western Union, many stores are in denial about how technology might change our industry over the next decade. While claims like MIT’s Nicholas Negropante’s recent remarks that printed books will be dead in five years are perhaps on the extreme edge, scenarios of at least 15-20 percent of textbooks sales being digital in that timeframe are becoming the low end of estimates. As a college store, ask yourself if you can afford to lose 15-20% of your business because you have not taken time to learn or prepare to offer the choice. If you can find one, ask your local music store how that approach worked out for them.

Printed textbooks are today’s buggy-whip. During times of radical change, incumbents often fail to survive because they do not understand that it is about market share and not margins. When a substitute product is introduced it is often of lesser quality, or erodes margins and revenue, making it unattractive to incumbents. Thus, the incumbents tend to allow new entrants to offer or promote those new offerings, all the while losing market share. When the traditional players finally decide they must offer the product they find themselves in a position where they have lost too much market share to catch up. Right now many current partners, competitors, and future competitors see stores clinging to the past rather than anticipating the future. The one strategy that is sure to fail is the “do nothing” option. If the rapid shift to digital in the trade book market is not enough to signal to collegiate retailers that digital change is coming then maybe we should be dusting off our buggy-whip displays.

Considering Options: Stop Giving Market Share Away
The picture gets grimmer, because some stores actually encourage market share loss by effectively telling their customers to go elsewhere! What are some practices stores engage in that accelerate market share loss? Here are some examples we have seen:

An open source (free) textbook is required by the faculty member, but the store does not provide students with access to the free version. This sends a message that the store is more about profit than about meeting student’s course material needs. Some students go away and do not come back because as they are out looking for their free textbook, they look for other things elsewhere too.
A digital or rental version is offered elsewhere, but the store does not offer digital or rental options. Again, students go away to look for the alternatives and may not come back.
The store does not offer price comparison, and students go away assuming that stores are non-competitive. Even if students find prices that are close or worse elsewhere, they are unlikely to make the effort to return to the college store site.
Believe it or not, some college stores (both large and small) as of 2010 cannot handle an online transaction or do not sell their textbooks via their store website. Most students have moved online, and students report buying as much as 45% of their textbook units online. That means those stores are handing almost half of their market share off to competitors before they even start!

If your store is unable to sell your primary product online in the year 2010, while some of the key competitors have been online for at least a decade, what is taking so long? A store or the industry does not have another 10 to 15 years to adapt to new forms of course materials and course material distribution. Suppliers will not wait, customers will not wait, and administrations will not wait for a college store to come to terms with very basic market expectations.

In other words, various stores do have practices that encourage their customers to leave them, thereby giving away market share to competitors. Those practices should be among the first to stop. Assuming your store is not engaged in any of these practices, what can you do? Each of the following items are about anticipating the future customer and going to where they will be. One of the biggest mistakes one can make as a business person is to assume customers will keep returning to you because they always have in the past.

If we begin with a simple approach, one could just uniformly lower margins. This is not the most brilliant of strategic moves, but may be necessary, and is not necessarily a bad choice. Let us look at a scenario that shows what this might mean, and then look at some more strategic approaches to working with margins. Once again, these numbers are for illustrative purposes only, and we will assume we are working with the same store from the last example.
Therefore:

That is a $50k decrease in R_n even before loss of market share. However, because the books are now more price competitive, more units should be sold, which represents either a gain in market share, or better retention of existing market share. If the number of additional units sold is great enough, the store might recognize a gain in R_n rather than a loss. Plus, if the students are coming to you to get textbooks, they are also the students coming to you for other products. Finding the optimal balance between margin and market share can be difficult and competing on price alone can be dangerous. As some have phrased it, competing on price alone quickly becomes a race to last place. However, margins mean nothing if there is no market share, and as market share grows the affect of a small change in margin on R_n increases. In other words, a small change in a big number is a big number.

Stores do not need to adjust margins uniformly across the board, and doing so can have a serious effect on profitability. If the store uses data analytics to compare prices with major online competitors, one quickly sees that stores may be either less favorably, comparably, or more favorably priced on different items. It is likely that the larger the adoption in general, the more likely the store is less favorably priced, as competition there is greater and on a per-store basis there is less economy of scale. Thus, one option is to engage in more dynamic pricing and adjust margins based on the level of competition for select titles.

Selective, surgical, calculated adjustments designed to mitigate loss of margin and market share can be accomplished but requires more sophisticated approaches, executive sponsorship and frankly more work for textbook managers. One group of stores reports that based on over a decade of research, more than 50 percent of the price advantage exhibited by online competitors resulted from data errors in files sent by publishers or flawed interpretation of the file by the receiving enterprise. If a store matches current market price they may find the error short lived on the site of competitors, but long-lived for themselves. There are a variety of practices which can distort market -based pricing, and thus the caveat that this tactic should be used carefully.

Many stores sell used books at roughly 25% of new, yet it appears that the average price of used books online is much closer to wholesale prices, making stores much less competitive on price using that model. This drives students to other sources for books and decreases trust in or belief in the college store’s efforts to improve affordability. More targeted adjustment of margins on used books might also positively affect a store’s ability to retain market share.

The tough competitive environment which currently focuses on price, combined with difficult economic and political environments, may force stores to compete more on price in order to remain relevant. This means reduced margins and reduced profits. Arguably, this is a difficult case to make when campuses expect increasing returns from college stores to support financial aid, student services, or other campus initiatives. In the market shift ahead, nearly all incumbents can expect the bottom line, and quite possibly the top line, to shrink in response to market forces. If we can survive the shift with enough market share intact, then the health of those lines should improve in the future.

Considering Options: Beyond Margins
Of course, stores cannot afford to compete on price alone, or sell below full costs. The challenges will be to preserve or replace margin dollars, and to sell at much lower costs. Stores must straddle the needs of an old infrastructural business model with a future model that is not yet fully defined. That is a liability competitors to the industry do not have. It may mean fewer people doing different things. There are many other strategies and tactics stores can use that shift the discussion somewhat away from price to build market share without affecting margins. For example, working with faculty to create custom publishing options can produce a win for all parties.

The top factors most faculty members consider in selecting a textbook is how well it matches what they want to teach and how they want to teach it. Crafting a custom textbook enhances that match for faculty, and creates a book they are more likely to use. At the same time, it can reduce costs for students, and the enhanced utility increases perceived value by students. Combined this can increase sell-through and units sold per FTE, which are different measures of market share.

Most competitors do not or cannot currently handle custom books, since they are often unique to a particular faculty member at a particular institution. While a particular custom text might represent a large adoption on a specific campus, as a somewhat unique adoption, it is small compared to other adoptions that spread across many campuses. This means that at a national level, the books are small adoptions and therefore less attractive options in terms of capturing market share. That does not mean there will not be competition, but it does open additional opportunities for stores to build market share more profitably.

The Channel Perspective
As the largest market share holders for course materials on a per-campus basis, our channel has the most to lose in terms of market share. The market share (i.e., "the business") is ours to lose. With technologies today changing industries more rapidly than ever, can we afford as individual stores or as an industry to not focus on market share?

This fall will be different from prior semesters. If e-reading and tablet devices follow a similar trajectory to other innovations in higher education over the past two decades, then we can expect that 50 to 75 percent of students will have some form of e-reader or tablet device in the next five years. With the devices will come demand for content and from that point forward, adoption of digital textbooks will increase rapidly such that as the end of the decade approaches, digital course materials could be the dominant form of textbook used by students.

As a channel, we need to prepare for this change. Our new and future competitors are sophisticated, have many resources, and they too are focused on market share. Traditional competition among bookseller segments must give way to cooperation and knowledge sharing to ensure that the channel survives a marketplace dominated by new entrants with aggressive market share targets. The simple fact is that individual stores lack the “minimum efficient scale” to compete against national rivals. In the old world they could compete as a specialty campus shop, but those days are going away. This will require active leadership and cooperation from our various business coalitions and associations in order to develop new channel options (both technology and partnerships-negotiations). Without it, even many of the most committed stores simply cannot make it. On the same token, however, no amount of industry planning will overcome a failure at the store level to plan and execute professionally. It will take preparation at both national and local levels to creatively reinvent the industry to make college stores a retail channel that survives digital transformation.

Concluding Observations
As part of your store’s strategic planning process take time to engage in some data analytics and scenario analysis. What is your current market share position on your campus? How does it vary across adoptions? What will it mean to your store if you lose 10% market share over the next five years? 20%? 50%? Campus Stores Canada is working on just such a scenario analysis currently, and the results of their work may be of interest to stores once it becomes available. If the students who buy textbooks buy everything else, can stores afford to lose the course materials business? Will stores have to reconsider their positions regarding sale of textbooks for profit versus fulfilling part of the institution’s academic mission? Most college stores work hard to reduce costs for students, but will our traditional approaches to doing so continue to work in the future?

College stores must focus on where the future business will be, not where it is today. This may require abandoning some of the traditional practices or accepting lower margins in a targeted way in order to survive the change to the industry. To be successful stores need to increase their sophistication and comfort with techniques like dynamic pricing, data analytics, price comparison, and new product generation.

NMS is here to help, as an R&D service to the industry we are here to help stores better understand the changes in their market space, particularly those related to technology. Our current and forthcoming partners can help create new revenue opportunities, improve positioning, and help stores retain or maybe even grow their current and future market share.