This article is about the market share.
Successful Marketing requires firms to understand which market they are operating in, who their consumers are and where they are located, whether the market is growing or shrinking, what the business’s share of that market is and how strong the major competitors are.
What is meant by market share?
Market share is the business’s portion of the total market sales expressed as the percentage. Or, the percentage of sales in the total sales within a specific market over a certain period of time, usually one year, or one quarter.
How to calculate market share?
The business’s share of the total sales and total market sales can be measured using either Volume of Sales (the number of units sold) or Value of Sales (the sales revenue received from the units sold).
Market share is calculated using the following formula:
Market Share = The firm’s sales / Total market sales x 100
Hence, market share, the proportion of the total market held by one company, can be either calculated using the two following ways:
- By Volume of Sales. The firm sold 1,000,000 units in 2021 while 10,000,000 units were sold in total in an industry in that year. The firm’s market share was 10%.
- By Value of Sales. The firm’s annual sales revenue was USD$25,000,000 in 2021 while the total annual sales revenue in an industry was USD$100,000,000 in that year. The firm’s market share was 25%.
Let’s comment of the results of calculating market share. There are four possible situations that might happen in regards to the firm’s sales and total sales of the whole market:
SALES ↗:
- SALES are growing and MARKET SHARE is growing. It means that the firm’s sales are increasing faster than the whole market’s sales.Â
- SALES are growing and MARKET SHARE is declining. It means that the firm’s sales are increasing slower that the whole market’s sales.Â
SALES ↘:
- SALES are declining and MARKET SHARE is declining. It means that the firm’s sales are decreasing faster than the whole market’s sales.Â
- SALES are declining and MARKET SHARE is growing. It means that the firm’s sales are decreasing slower that the whole market’s sales.Â
Problems with calculating market share
It is sometimes difficult to make comparisons of market share between different companies and between different markets.
Problem 1: Volume ≠Value
Firms that sell small quantities of expensive products are likely to have a higher market share measured in Value of Sales than when measured in Volume of Sales. On the contrary, firms that sell large quantities of cheap products are likely to have a higher market share measured in Volume of Sales than when measured in Value of Sales.
Problem 2: Boundaries of the markets
When the market is difficult to define or when markets intertwine, it will be hard to calculate the exact market share of each company.
Problem 3: Validity of sales data
Any calculation of market share can be considered out-of-date as sales data represents a historical situation from the past months or years, not necessarily the current position. Public limited companies report their sales and earnings data on quarterly and annual basis.
Problem 3: Exchange rates fluctuations
This issue applies to multinational firms that sell their products in different countries in different currencies. As exchange rates constantly fluctuate, it might be very difficult to make most-up-to date calculations regarding the value of company sales.
Why is market share important?
Market share is the key test for the firm’s marketing strategy.
Market share serves as a way to measure the success of the business’s marketing strategy against its competitors. When the firm’s market share is increasing, it means that the business is more successful than its competitors – it is selling more products faster than other firms in the industry, or is generating more sales revenue than competition. The marketing strategy works!
There is also a relationship between having high market share and profitability of the business. While the firm with the largest market share is not necessarily the most profitable one, high market share gives the business two advantages.
- The pricing power to set higher prices and boost sales revenue, hence to increase profits maintaining its costs.
- A range of internal economies of scale as the larger the business is, the lower the average cost of production can be, hence to increase profits without increasing spending on promotion.
Companies with large market shares also enjoy other benefits such as the status and prestige gained from being a dominant market player. You can find more benefits in the article Benefits of Being the Market Leader.
In summary, market share is measured by expressing the sales of one business as a percentage of the total sales in the whole industry per time period.
