What’s it: Market share shows you how much a company dominates the market. You calculate it by comparing company size to market size, expressed as a percent. You can calculate it using several measures such as sales value, sales volume, number of customers, revenue, and production volume.
Say you are using sales value. Market share tells you that the company controls x% of the total sales value in the market.
Why market share matters
Marketing effectiveness. Seeing market share trends from time to time is the most effective way to measure the success of a company’s marketing strategy relative to competitors. If the percentage increases, then the product marketing is relatively more successful than competitors.
Market position. Market share describes how strong a company’s position is in a market. It measures a company’s relative performance against competitors. When a company has the highest market share, we call it the market leader.
Market leaders strive to maintain their market share through new product innovations and distribution channels and significant promotional spending. They do this to protect against attacks by market challengers who seek to increase their market position.
Profitability. When dominating the market, companies can sell more products. It is essential to achieve higher economies of scale and lower unit costs. Thus, they can achieve lower unit costs than the average competitor. Assuming the selling price is the same as the average competitor, they generate a higher profit margin and profitability.
Market structure. You rely on market share to calculate market concentration using the concentration ratio or the Herfindahl – Hirschman Index. It is useful for knowing in which market the company operates, whether monopoly, oligopoly, or monopolistic competition.
How to calculate market share
Calculating market share is often subjective. It depends on how you define the variables you use. Maybe you define it more broadly, for example, the food market. Or, you define it more narrowly as organic food, pizza, or canned foods.
Calculating market share is easy. You just have to compare the company’s sales with total sales in the market. The following is a market share formula:
Market share = (Company sales / Total market sales) x 100%
Please remember. You can use the sales value or volume for the numerator above. Or, you replace it with some other relevant measures such as production volume, production value, production capacity, or assets, depending on the context of your analysis.
Also, market share is subject to the definition because it may relate to global markets, national markets, or local markets. For example, suppose the market value for organic food products in the national market is $250 million. If the company generates sales of $30 million, then its market share is 30%. The percentage will be different if you use the global market as the basis for calculation.
Furthermore, using a measure of sales volume and sales value will also yield different percentages. Take, for example, two smartphone companies, low-end and high-end. Both of them will probably produce equal sales value (revenue), which means that their market share will also be equal.
Meanwhile, if you use sales volume, the market share of the two may be different. Lower-end smartphone companies have to sell more products to generate sales. That means its market share will be higher when measured by volume.
Types of market share
There are two alternatives for you to calculate market share, based on the denominator you are using.
- Absolute market share
- Relative market share
Absolute market share shows you how a company is performing relative to all its competitors in the market. In this case, you take the total sales in the market as the denominator.
To calculate, you take the company’s sales over a specific period and divide by the total market sales. For example, suppose that the sales value for a carbonated drink is $100 million. If the company generates $20 million in sales, its market share is 20% ($20 million / $100 million).
Under the relative market share, you use the competitor’s market share percentage as the denominator. It tells you how the company is doing in terms of its biggest competitors. That way, the company can make strategic decisions to increase sales.
In the previous example, the company controlled a 20% market share. This means that 80% of the sales value of carbonated drinks is controlled by competitors. Using this data, we divide 20% by 80% to get its relative market share, 25%.
How to increase market share
Firms increase market share by selling more than competitors. To do so, they will have to acquire more new customers, which may be customers who haven’t bought a product or competitors’ customers. Alternatively, they could also increase sales by encouraging existing customers to buy more.
Some specific strategies to increase sales, including:
Increase economies of scale. When operating at higher economies of scale, firms can achieve cost advantages by lowering unit costs. With lower costs, the company can lower its selling price below the average of competitors. That ended up bringing more demand for the company’s products.
Build a reputation. Strengthening reputation not only makes existing customers loyal but also encourages customers to move away from competitors. Some large companies, such as Nike and Apple, rely on reputation to boost sales of current or new products. Both have built it over a long period, resulting in strong brand equity in the market.
Increase bargaining power. Strong bargaining power benefits the company in negotiating with suppliers or distributors. For example, companies can save costs by negotiating sales discounts and more lenient credit terms with their suppliers. Companies can also increase product visibility on retail shelves with their retailers.
Intensifying distribution channels. Companies add new distribution channels to reach more customers. For example, they can take advantage of social media or websites to increase demand from overseas customers.
Modify product attributes. Companies drive sales by adding features and improving product quality to attract customers.
Increase ad spend. This helps the company grow by attracting new customers and encouraging more purchases by existing customers. Advertising is for building awareness of the product and informing and persuading customers to buy.