Market share is a type of market prospect ratio that shows the number of sales in an industry that a company generates compared to the total sales generated in that industry. We will look at the market share formula, examples, and the different types of market shares with their analysis.
What is market share?
Market share means the percentage of total sales in an industry that a particular firm generated. Analysts calculate it by dividing the firm’s sales by the total sales of the industry over a given period of time. This metric is important because it gives a general overview of the size of a firm in relation to its market as well as its competitors. In this case, the market leader is the firm that possesses the largest share of market.
When a business holds a large market share, it is an indicator that the firm is successful. Such a business has the ability to offer set prices in the industry as competitors look forward to following their lead. At the same time, a business with a large market share may be subject to anti-competition laws as well. These laws are sales restrictions that the government imposes in order to prevent a single firm from monopolizing the industry.
Market share measures how dominant a company is in the market. In general terms, larger firms have the highest market share because they are able to provide products and services more efficiently and effectively.
Market share and market size are interrelated in the sense that market share can determine market size. However, they do not mean the same thing. While the market size is given in the volume of sales or value of products, analysts use market share over time to determine if a market is growing or declining.
Types of market share
- Revenue market share (RMS)
- Customer market share (CMS)
- Volume market share (VMS)
These are the three prominent types of market share
Revenue market share
This type of market share is calculated based on the revenue that a company generates compared to competitors. It takes into account the total sales of a particular product or segment in the entire market and it is a representation of individual market shares as a percentage of the total.
Customer market share
This is the ratio of the total number of customers in comparison with the total number of customers in the industry. Mostly, this type of market share is used where the number of customers and subscriptions possess more value. Industries like broadband, media, and telecom make use of customer market share.
Volume market share
The volume market share is the ratio of the units that a company sold compared to all units that all companies sold across the industry. Oftentimes, automobile sectors represent the market share figures when it comes to the units of cars sold monthly or quarterly.
How to increase market share
- Lowering prices
- Strengthening customer relationships
- Increase quality
- Hire talented employees
The target market share of a firm is attained by following the steps listed above as well as looking out for weaknesses and working on them.
Innovation or new technology is an excellent method that a company can use in increasing its market share. This can take the form of product innovation, production method innovation, or the introduction of new technology to the market that the competitors are yet to offer. It is certain that customers become more loyal, a company can gain an edge over its competitors and dominate the industry by being innovative.
Also, for a firm to maximize its market share, it can lower its prices. This is because when a firm lowers its prices, more customers will be attracted. With this, the customer base will widen which will bring about an increase in sales thereby increasing the firm’s market share.
Strengthening customer relationships
The act of strengthening existing customer relationships helps in protecting the existing markets of companies. Also, the company is able to ensure that it does not lose its existing customer base to high competition. When a company strengthens its relationship with customers, customer satisfaction will increase proportionately. This will cause satisfied customers to speak of their positive experiences to others thereby bringing new customers. This helps a company to gain market share and increase its revenue without an increase in marketing expenses.
Although advertising is expensive, it is an effective way to increase market share. With the high rate of competition in the market, advertising is excellent in gaining an upper hand over competitors.
It is evident that aside from prices, customers are becoming more conscious of product quality. By ensuring higher quality standards, a firm can bring about an increase in its market share.
A firm can establish dominance over the industry by acquiring a competitor. With this, a company will not only gain access to a new customer base but will also reduce competition in the industry. If competition reduces, this will help a firm to gain dominance thereby increasing its market share.
Hire talented employees
Oftentimes, companies that have the highest market share in their industry have employees that are skilled and dedicated. When the best employees are on board, expenses will reduce in relation to turnover and training. With this, a company can devote more resources to focusing on core competencies. Competitive salaries and benefits attract the best employees.
Market share examples of common companies
- Nike market share
- Tesla market share
- Google market share
These are a few examples of firms that own substantial market shares in the real world.
This is a firm in the athletic and apparel industry that sells a wide range of sports equipment, casual shoes, and accessories. With the production of footwear alone, the global market share of Nike is estimated to be 29.25% and it is a brand that competes with Adidas and Under Armour.
Tesla is a firm in the automobile industry that manufactures electric vehicles (EV). Within the electric vehicle industry, the market share that Tesla holds is estimated to be 18%.
Although the figure seems small, it is important to understand that the market for the EV industry globally is smaller than that of vehicles. In the automobile industry, the market share of EVs is estimated to be 2.8% and that of Tesla is 8%.
Tesla forms part of the automobile industry, a producer of electric vehicles (EV). Within the EV industry, Tesla holds an 18% market share. The differences are significant, therefore, it is important to make a relative market share analysis to compare one’s business to its direct competitors rather than just the market as a whole.
The market share that Google holds is 91.86% in the search engine industry. Because of this, Google is the most popular search engine in the world. It dominates the market. Bing is the second largest industry or market leader with its market share estimated to be just 2.71%.
Why is market share important?
The importance of market share is in different areas. First and foremost, it is an indicator that shows how competitive a firm/company is. When a firm maximizes its market share, it can improve its profitability. This is because of the fact that as the size of a firm increases, it scales in production, and offering products at lower prices can limit the growth of competitors.
There are cases in which a firm may go as far as operating at a loss in some segments just to push out competitors or force them into bankruptcy. After achieving this, the firm can increase its market share as well as increase prices. In financial markets, market share can have a great impact on the prices of stock especially. In cyclical industries, competition can be fierce when margins are narrow. Any difference in market share may either be a trigger of weakness or strength in investor sentiment.
In industries that are based on discretionary income, market share is immensely important. It is important to note that a firm can have too much market share which is known as a monopoly. An increase in market share allows a firm to achieve greater economies of scale in its operations thereby improving profitability.
Low market shares are indicators that there is a need for the company to focus on customer acquisition, marketing to increase brand awareness, and overall revenue-increasing strategies. On the other hand, high market shares are indicators that the current strategies of a company are effective and that focus should be placed on efforts towards customer retention and innovation.
In essence, market share is the indicator of a brand’s performance relative to its competitors in the market. Revenue alone cannot accurately point out the position of a firm in an industry because there are times in which revenue may be higher while the share is low. When this happens, it implies that customers like the product but less so compared to its existing customers. Furthermore, it means that the brand is forgoing a considerable customer base that is loyal to other brands.
Even as a firm needs to increase its revenue, it should also keep an eye on its market share because it is the real indicator of a firm’s growth as well as its market position.
How to calculate market share
As stated in the beginning, market share is calculated by dividing the sales of the company by the total sales made in the industry at a given period of time being expressed in percentage.
The process of calculating market share is fairly straightforward irrespective of the type of industry. The following steps are to be followed;
- Select a fiscal period
- Calculate the sales of the company
- Calculate the aggregate sales of the industry
Below, we explain in detail how to find market share;
Select a fiscal period
The first step to take while calculating a firm’s market share is to identify the fiscal period you desire to review. This could be a quarter, a year, or more.
Calculate the sales of the company
Calculating the total sales of the company for the identified period is the next step. For larger companies that have products spanning multiple industries, we would calculate the market share of each industry separately, not on the basis of the company’s total sales. An instance is where a retail store sells food, clothing, and furniture. In this case, the market share would be calculated in the grocery industry based on their food sales alone, based on clothing alone, and based on sales of furniture.
Calculate the aggregate sales of the industry
After calculating the individual company sales, the next step is to calculate the aggregate sales of the industry, that is the total sales for the entire market. Oftentimes, this information is publicly available in research reports as well as through industry associations. Also, if several large retailers with minimal small business sales dominate an industry, one could combine the sales of the major retailers in order to calculate the total sales.
The last step to take is to divide the total sales of the company by the total sales of the industry. The result will produce a decimal figure that is convertible to a percentage by multiplying it by 100.
Market share formula
The mathematical expression of the market share calculation is;
Market share = (Company sales / Total market sales) x 100%
Revenue market share
If a company that sells toothbrushes made sales of $200,000 while the entire market for toothbrushes is $500,000, then the market share of the company is;
Revenue market share = $200,000 / $500,000
Revenue market share = 40%
Volume market share
If a shoe producing company sells 500 shoes and the total number of shoes sold in the shoe industry is 4000, then the market share of the company is;
Volume Market Share = 500 / 4000 x 100
Volume Market Share =12.5%
Customer market share
If a steel company has 250,000 customers and all the customers in the steel industry are 1,000,000, then the market share of the company is;
Customer Market Share = 250,000 / 1,000,000 x 100
Customer Market Share = 25%
Comparing market shares
Among other things, a market share serves as a tool for comparison as it gives companies the room to compare themselves to their competitors. It also allows the general public as well as financial professionals to have an understanding of the performance of a firm in a given market. These comparisons serve as a vehicle that drives decisions that are related to investment and marketing that have an impact on individual companies, consumers, and the industry as a whole.
Typically, firms calculate market share on the basis of revenue and unit sales, however, certain industries may focus on just one factor. An example is when an industry with a competitive and consistent price point across might realize that the statistics of revenue vs unit sales will provide the same information. Conversely, an industry that has a large difference in price between companies would see comparing market shares on the basis of total revenue as more useful.
It is possible for a company to sell a large number of units but if sold at a very low price point, then it will imply a lower revenue market share than for a company selling fewer units at a much higher price. Here, if one compares unit prices alone, this would not present an accurate picture of the total revenue of the company as well as its presence within the industry.
Relative market share
Relative market share gives an overview of how a firm is doing in terms of its leading competitor. It allows a firm to identify major competitors and understand its position in the market. In other words, relative market share measures a firm’s performance in relation to the most powerful competitor in the market.
Relative market share formula
Relative market share = Firm’s market share / Largest competitor’s market share x 100
If a firm has a market share of 15% and the largest competitor in the industry has a market share of 70%, we would calculate the relative market share as;
Relative market share = 15% / 70% x 100
Relative market share = 0.21 x 100
Relative market share = 21%
How to analyze market share
In analyzing market share, a firm takes account of the total market size, the growth rate of the market, carries out market segmentation as well as identifies the spaces that service providers crowded in a geographical area. Also, a firm should identify key players in the market and carry out a SWOT analysis. It is also important for a firm to take into consideration emerging opportunities that are bound to make the market grow faster and larger as well as acquire business more easily. A firm should plan for the worse in order to provide continuity. This facilitates the achievement of target market share.
- Economies of scale
- Increased sales
- Increased customer base
- Dominating the industry
- Increased bargaining power
Economies of scale
An increase in the market share of a company can allow a firm to operate on a greater scale thereby increasing profitability. Also, it helps a company to develop a cost advantage over its competitors.
When a firm’s market share increases, it helps in boosting total sales. When consumers take notice of the brand loyalty of a majority of their peers, this drives the remaining consumers to purchase that product.
Increased customer base
With an increase in market share, a company will be able to widen its customer base. This is because as a majority of the customer base remains loyal to one brand, the rest may follow as well.
When a firm’s market share increases, its reputation will increase correspondingly. In turn, a good reputation helps in boosting sales and expanding the customer base.
Dominating the industry
When a firm increases in market share, this helps in increasing its dominance in the industry under which it operates.
Increased bargaining power
With an increase in market share, a firm begins to dominate an industry. Furthermore, with an increase in dominance within a specified industry, a firm is able to exercise certain powers including greater bargaining power. With this, one begins to have an upper hand as well as being able to negotiate to its advantage with suppliers and members of the channel of distribution.
The drawback of market share is that looking at a single year’s data can be deceptive. This is because one can only know the current position of the firm but there /will be no clue with regard to its growth or decline. It is only when the data of past years is being viewed as well as the changes in market share are being calculated that the real performance of the /firm will be traceable.
Analysis of market share is a key to understanding the firm’s performance over time in relation to its competitors. A market share analysis needs to take into account the total size of the market, making reference to the annual business volume either in currency or in the number of transactions. The analysis should also take note of the growth rate of the market, that is the Compounded Annualized Growth Rate (CAGR) that is being taken over the period of three to five years.
Market share analysis displays the breakdown of the size of the market in terms of percentage which helps in the identification of top players, the middle players, and the minor players in the marketplace. This is on the basis of the volume of business conducted.
Market share leadership
Market leadership refers to the position of a company that holds the largest market share or the highest profitability margin in a particular market for goods and services. As seen above, market shares are measurable either by the volume of goods or the value of those goods. In many cases, pioneers lose their market lead and initial market share to imitators who capitalize on the areas of weakness of the pioneers.
For anyone who desires to be a market leader, Steve Jobs suggested the following;
- Have ownership and control over the relevant technology in the specific market you are in and this can be done either through the use of the patent or other proprietary protections.
- Adopt and implement better technologies immediately anytime they become available irrespective of whether other firms are making use of them or not.
- Be the first to make use of a technology or create a category for a product. After that, make it an industry standard.
With this, we can say that a market leader refers to the firm that holds the largest market share in a specific industry that can oftentimes make use of its dominance to impact the competitive landscape and direction of the market take. Typically, a market leader enjoys the greatest market share or the greatest percentage of total sales within a specific industry or market. Based on the other metrics, a market leader may surpass its competitors in the area of brand loyalty, perceived value, image, price, distribution coverage, promotional spending, and profit.
Such a firm may be the first developer of a product or service which would give room for it to set the tone for messaging, define the ideal characteristics of the product, and gain consideration by the market as the brand that consumers associate with the offering itself.
As earlier pointed out, a firm can establish itself as the leader in the market by being the first to offer a product or service. It is critical for this product or service to be good enough to attract a customer base. Also, the company must be able to take into consideration the preferences of consumers in order to maintain its leadership.
As a competitor to the first mover, if a firm enters the market, it is possible for it to aggressively market its own version of the product with its unique and differentiated features. For competitors that look forward to market leadership, they may have to invest heavily in market research and the development of products. Also, such a firm will have to make use of consumer information to develop features that bring about an improvement in an existing product.
To control market prices, market leaders may be able to achieve economies of scale. Consumers have a high trust level for market leaders and because of this, they will prefer to minimize risk by making purchases from market leaders.
Market leaders are greatly aware of the purchasing decision-makers in their customer base as well as leverage aggressive advertising to take advantage of that knowledge in the course of strengthening their brand. It is certain that they have high market power because they control market prices.
The highest-quality development partners are being attracted by the market leaders, and there is a higher chance of them being innovative in the adopting of technologies and processes that will help them to continue outshining their competition.
Examples of market share leaders are;
- The position of microsoft in the operating system (Windows) and Web broser (Internet Explorer) markets.
- The share of Apple of portable media player sales (iPod)
- The dominance of Comcast in broadband Internet access (cable modems) in several areas of North America.
- The position of Facebook in the social media industry.