What is Market Share and How to Calculate it?

The part or percent or amount of a market obtained by a company is termed the Market share. In simple words, market share defines the total sales of a company compared to the total sales of the entire industry in which it operates. This gives a proportionate percentage of the company among its operating industry. If market share is viewed from the customer’s perspective, then market share would be the percentage a company holds among all the purchases made by the customer in a particular product or service. For example, if a consumer purchases 100 bottles of shampoo as a whole and a certain shampoo maker sells 30 bottles, then the particular company holds a 30% market share. This calculation of the market share holds a company’s total sales over a particular time frame and the total sales of the industry operating within that period.

Geeky Takeaways:

• Market share is the part or percentage of a market gained by an organization or a company. The total sales of a company about total sales of the industry is the market share of the company.
• If market share is viewed from the customer’s perspective, then market share would be the percentage a company holds among all the purchases made by the customer in a particular product or service.
• This calculation of the market share holds a company’s total sales over a particular time frame and the total sales of the industry operating within that period.
• The company that has the highest market share and usually holds the maximum influence over the market is known as the Market leader in an industry.
• There can be two types of market share: Value share and Volume share.

Why is Market Share Important?

1. Measurement Tool: Market share is the measure of the customer’s preference for a particular product over other similar products. This implies higher the market share, the greater will be the sales, and the lower the effort required to promote sales ultimately building a stronger barrier for competitors to enter that position.

2. Key Indicator: Market share is the key indicator for understanding a company’s competitiveness. An increase in the market share implies an improvement in the profitability of a company. This occurs because, with an increase in the size of the company, they scale up their production and then can offer products at a lower price which ultimately limits the growth of their competitors.

3. Competition: Sometimes, this competition reaches such a level, that the company operates at losses to push out competitors or force them to fall into bankruptcy. After reaching this point, the company can increase its market share and then increase its prices.

4. Affects Market: In financial markets, market share is an important component that effectively affects stock prices. This happens in cyclical industries with low-profit margins and huge competition. A slight change in the market share may trigger strength or weakness in the investors’ minds.

Formula for Market Share

The formula for market share is given below. This calculation will provide an overall picture of the position of a company in its respective industry.

Market Share = ( Total Company Revenue / Total Industry Revenue ) x 100

How do You Measure Market Share?

There are different ways of measuring market share of which the general way is to calculate the percentage of sales with respect to the entire industry. The following steps show the calculation of a market share.

1. Period to Analyze the Market Share: From the financial statements, monthly, quarterly, or yearly data can be obtained. One should keep in mind that information from two sides should be required- one from the particular target company and the other from the entire industry in which that company operates.

2. Select the Basis for Market Share: Usually, market share is determined by the amount of sales. Nonetheless, non-financial aspects of a company can also be selected. For instance, a company’s total number of customers can be compared with the total number of customers in the entire industry.

3. Determine the Individual Total of the Company: This can be either total sales from a pre-decided period or the total units sold. This data can be obtained from multiple independent sources like the trading groups, periodic financial disclosures issued by the company, or the regulatory bodies.

4. Determine the Total of the Entire Industry: This value must correlate with the source in the previous step. It should be of the same time frame and the same methodology must be used. Suppose, in the previous step, a particular region is selected, then in this step also that particular area must be defined.

5. Comparision: The value obtained from both the above two steps must be divided (i.e., company data with the industry data). This gives a percentage that represents the company’s presence in the total market. Companies with a larger percentage value cover a greater market or have a larger market share and the quotient should not exceed 1 (or 100%).

Benefits of Market Share

1. The investors and the financial analysts closely examine the fluctuations of the market share as it signifies the relative competitiveness of the products or services of a company.

2. A company that is growing its market share can grow its sales faster than its competitors.

3. With the growth of the total market share of a particular product or service, if a company can maintain its market share, then this means it can generate revenue at the same pace as the growth of the total market.

4. An increase in the market share can help a company to obtain a larger scale in its operations and increase profitability.

5. To increase a company’s market share, it can either lower the price of its products, use promotional strategies, or introduce new products in the market.

6. The company can also increase the size of its market share by expanding its target audience or other demographics.

Impacts of Market Share

1. Economies of Scale: Growth in the market share of a company allows the company to scale up its operations and improve profitability. This further allows the company to obtain a cost advantage over other competitors.

2. Growth in Sales: The total sales of the company can be increased with growth in the market share. When customers observe brand loyalty among their peers towards a particular company, the other customers also get attracted to purchase the product from that particular company.

3. Improve Customer Base: As the market share of a company increases, the customer starts believing in that company and this broadens the customer base. When most customers follow a particular brand or product, the other customers will also get drawn to that brand or product.

3. Goodwill: If the market share of a company improves, the goodwill or reputation of the company also increases. A good reputation has the potential to increase sales and widen the customer base.

4. Industry Dominance: A company can increase its dominance over its operating industry if the market share increases.

5. Enhance Bargaining Power: If a company can dominate the industry, then it can entertain bargaining power and certain other powers. With the increase in market share, the company can have an upper hand and will be able to negotiate with their suppliers and distributors to their advantage.

6. Type of Industry: If a change in the market share of a company, the performance of the company gets impacted at a larger scale, than it is in the mature or cyclical industry. If the change brings minimal impact to the company’s performance, then it is in the growth industry.

How can Companies Increase Market Share?

There are multiple ways in which companies inculcate to improve their market share. Some of these ways are as follows:

1. Innovative Technologies

Innovation is one of the best ways to increase market share. There can be different forms of innovation such as innovation in product, innovation in the production method, or introduction of a new technology in the market which would give a blow to the competitors. Innovative techniques can give an edge to the company over its competitors and provide a dominating position in the industry. This method would attract customers which would add to the company’s market share.

2. Enhance Customer Relationships

Building customer loyalty is an important technique to gain market share. Strengthening customer relationships would help the companies protect their existing hold on the market by avoiding the exit of present customers due to attractive offers by competitors. By focusing on relationship building, companies can build customer satisfaction which would help in increasing customer base due to word-of-mouth from the satisfied customers to their near and dear ones.

3. Acquisitions

A strong method to increase market share is acquiring a competitor and increasing dominance over the industry. The acquisition helps the company to increase its customer base as customers from the acquired company would also fall in the customer base of the new company. This would reduce competition in the market and finally increase the market share. Thus, when a company is in the growth industry, the management often seeks to acquire a competitor for their advantage.

4. Reduce Prices with Better Quality

By reducing the prices of products and services, companies can expand their market share as low price attracts more customers. If the number of customers is increased, then there will be more sales which in turn increases the market share of the company. Further, in the current era, customers purchase those products which are high in quality.

5. Hire Talent

If talented employees are on board, the companies need not focus much on training or turnover rather they can devote their time and resources to building core competencies. Best talented employees can be hired by providing competitive salaries and benefits including flexible schedules and casual work culture.

What Strategies are Used to Gain Market Share?

Companies use multiple types of strategies to improve their market share.

1. It may initiate by introducing new innovative technologies or techniques to attract customers. The companies should be the first ones to introduce these innovations, which would give them an edge over their competitors.

2. Another method can be building and nurturing customer relationships by developing brand loyalty among its existing customers and expanding its customer base via word-of-mouth.

3. In addition to this, if companies hire skilled employees, the expenses on turnover and training of employees would be reduced. This would allow companies to focus more on their core competencies.

4. Further, to gain market share, companies try to reduce the prices of their goods so that more customers can be attracted. Lowering prices can sometimes make a company the market leader in the operating industry.

5. Along with low prices, nowadays, customers prefer high-quality products and services. If a company can provide low prices without compromising the quality of products and services, then its customer base would increase which in turn improves its market share.

6. Finally, if a company acquires a competitor, it would reduce the competition in the market and the customer base of that company would increase, ultimately increasing the market share.

Conclusion

The market share of a company is an important feature of knowing the position of a particular company in the industry in which it operates. A larger market share depicts higher sales for the company as compared to its competitors in the industry. Market share is the percentage of the total sales or revenue generated by the company concerning the industry total. The value of market share also depicts the size of the company and its influence in the industry. This value is also an indicator of the growth and success of the company.

Therefore, companies or organizations always try to increase their market share by incorporating certain strategies and techniques to move ahead of their competitors. Some of the techniques are delivering high-quality products and services, implementing good marketing or promotional techniques, implementing innovative technologies and developing innovative products, acquiring competitors, and finally building customer loyalty.