What is Market Share?

The market share of a firm or organization is the percentage or proportion of a market that it possesses. In other terms, a company’s market share is the ratio of its total sales to the entire industry sales of the industry in which it works.

Market share is calculated by dividing the company’s sales for the period by the industry’s total sales over the same period. This metric helps get a sense of a company’s size in relation to its market and competitors.

Definition of Market Share

What is the meaning of Market share? A company’s market share reveals how well it does compared to its competitors. A bigger market share usually means that a company makes more money than its competitors because it effectively extends its consumer base. However, this is not always the case. Sometimes there are simply hurdles to entry in a sector, allowing a business to dominate a large part of it. This frequently results in a dominant system.

Companies attempt to increase sales and outperform their competitors in various ways. Some attempt to expand their economies of scale (a higher production at a lower average cost) to give lower-cost items to consumers, while others strive to develop brand awareness and consumer loyalty.

The market share of a firm is the percentage of total revenues in relation to the market or industry in which it works.  To estimate a company’s market share, first, choose a time period to study. It might be a fiscal quarter, a year, or several years.

Next, compute the total sales of the firm throughout that time period. Next, determine the overall revenues of the company’s industry. Finally, split the company’s entire revenue by the total sales in its industry. For example, if a firm sold $100 million in tractors in the United States last year and the total number of tractors sold in the United States was $200 million, the firm’s U.S. market share for tractors would be 50%.

The two most common categories are:

1. Revenue Market Share (RMS)
rnThe market share is computed based on revenue earned in comparison to rivals. It reflects individual market shares as a proportion of total sales of a certain product or sector in the overall market.

2. Customer Market Share (CMS)
rnThe overall number of customers in the sector or business is the ratio of the total number of customers. This is most commonly utilized in industries where the number of consumers and subscriptions is more valuable. Customer market share is widely used in the telecommunications, broadband, and media industries.

Why is Market Share Important?

Simply put, a company’s market share is a key indicator of its competitiveness. When a corporation grows its market share, its profitability improves. This is because when corporations develop in size, they may scale as well, giving lower pricing and limiting the expansion of their competitors. In certain situations, businesses will go so far as to operate at a loss in some divisions in order to drive out competitors or force them into bankruptcy. Following this, the corporation may grow its market share and raise its pricing even higher. Market share may significantly impact stock prices in financial markets, particularly in cyclical sectors where margins are tight and competition is severe. Any significant variation in market share may cause investor sentiment to weaken or strengthen.

Market share changes have a greater influence on the success of organizations in mature or cyclical sectors with limited growth. On the other hand, changes in market share have less of an influence on enterprises in emerging sectors. Because the entire pie in these industries is expanding, firms may still generate sales even if they lose market share. Sales growth and margins have a greater impact on stock performance for firms in this circumstance than other factors.

Competition for market share is fierce in cyclical sectors. Economic considerations have a greater impact on the variation of sales, earnings, and margins than other elements. Due to competition, margins are often low, and operations are performed at maximum efficiency. Because sales come at the cost of other businesses, they engage substantially in marketing and even loss leaders to capture sales.

Companies in these industries may be ready to lose money on items momentarily in order to drive competitors to quit or declare bankruptcy. They aim to raise prices after gaining a larger market share and evicting competitors. This technique has the potential to work, or it has the potential to backfire, increasing their losses. However, this is why certain industries, such as cheap wholesale retail, are controlled by a few large companies, such as Sam’s Club, BJ’s Wholesale Club, and Costco.

Benefits of Market Share

Investors and analysts closely monitor changes in market share because they might indicate the relative competitiveness of a company’s products or services. As the overall market for a product or service expands, a firm that maintains its market share sees its revenues rise at the same pace as the total market. While increasing its market share, a corporation will see its revenue increase quicker than its competitors.

Increased market share can enable a corporation to acquire greater scale in its operations and improve profitability. A corporation might aim to increase its market share through cutting pricing, promoting, or launching new or different items. Furthermore, it can increase the amount of its market share by appealing to other audiences or demographics.

How does Market Share relate to ROI?

The typical market leader’s ROI is around 28 percentage points higher than the average small-share business’s ROI for occasionally purchased items. For regularly purchased items (those bought at least once a month), the ROI disparity is roughly 10 points.

Rarely purchased products are typically long-lasting, higher-unit-cost commodities such as capital stock, equipment, and durable goods, often complicated and hard to analyze for purchasers. Because there is a greater risk of making the wrong decision, the buyer is frequently ready to pay a premium for guaranteed quality.

Products that are often purchased have a low unit value, such as groceries or industrial supplies. In most circumstances, the risk of buying from a lesser-known, small-share provider is reduced, so a buyer can feel free to browse around.

There is an association between market share and profitability. There are at least three options.

Economies of scale

The most obvious reason for large-share organizations’ high rates of return is that they have achieved economies of scale in procurement, manufacturing, marketing, and other cost components. A company with a 40% market share is simply twice as large as one with a 20% market share, and it will achieve, to a far greater extent, more efficient operating methods within a certain sort of technology.

Management quality

The most straightforward reason for the market-share/profitability link is that both share and ROI reflect a single underlying factor: managerial quality. Good managers (including, possibly, lucky ones are effective in gaining a large part of their respective markets; they are also adept at controlling expenses and maximizing staff productivity, among other things. Furthermore, if a company obtains a leadership position, possibly by inventing a new field, it is far simpler to maintain that position than for others to catch up.

These possibilities for the existence of the market-share/profitability link are not mutually incompatible. A large-share firm may profit from all three types of relative advantages to some extent. However, it is critical to determine how much of the enhanced profitability that comes with a large market share originates from each of these or other sources based on the available data.

Formula for Market Share

The calculation of Market share is simple. Here is the formula. 

market share =Total sales of the Company/Total Sales in the industry

Setting Market Share Goals

Market shares are feasible or even desirable, it obviously depends on many factors like the strength of competitors, the resources available to support a strategy and the willingness of management to forgo present earnings for future results. It is divided into three categories:

1. Building strategies based on active efforts to increase market share by means of new product development, new marketing programs, etc.
2. Retaining Strategies to maintain current market share.
3. Harvesting strategies are designed to achieve high short term earnings and cash flow by permitting market share to decline.

How to Increase Market Share?

A company can increase its market share by offering its customers an innovative product, strengthening customer loyalty and hiring talented employees and so on.

New technology

Innovation is a method by which companies can increase market share. When a company brings to market a new technology its competitors have yet to offer, consumers wishing to own the technology buy it from that company even if they previously did business with a competitor. Many of such consumers become loyal customers, which adds to the company’s market share and decreases market share for the company from which they switched.

Talented Employees

Companies having the largest market share in their respective sectors typically have the most competent and devoted employees. Bringing in the finest personnel lowers attrition and training costs, allowing businesses to concentrate more resources on their core capabilities.

Customer Loyalty

Companies maintain their existing market share through building customer connections, which prevent current consumers from jumping ship when a competitor launches a new offer. Gaining market share through word of mouth enhances a company’s income without increasing marketing costs.

Advertising

Advertising is an expensive but effective strategy for expanding market share. With fierce rivalry in the market, advertising is an effective strategy to obtain an advantage over competitors.

Lowering prices

Lowering pricing might also assist a company in increasing its market share. Reducing prices will attract more consumers, broaden the client base, and improve sales, thus increasing the company’s market share.

Building strategies for Market Share

To gain a greater market share, a company can use one of many strategies can introduce new technology to attract customers that may have otherwise purchased from their competitors. Secondly, nurturing customer loyalty is a tactic that can turn into a solid existing customer base and expansion through word of mouth. Thirdly, hiring talented employees prevents costly employee turnover expenses, allowing the company to prioritize its core competencies. Lastly, with an acquisition, a company can reduce the number of competitors and acquire their base of customers.

One approach for increasing a company’s market share is through innovation. When a company introduces a new technology that its competitors have yet to provide, consumers who want to possess it buy it from that firm, even if they previously conducted business with a competitor. Many of such clients become devoted customers, increasing the firm’s market share while decreasing the company from which they transferred.

Companies defend their existing market share through building customer connections, which prevent current clients from defecting when a competitor launches a hot new offer. Even better, firms may increase market share with the same easy strategy because delighted customers typically tell their friends and family about their pleasant experience, which leads to new consumers. Gaining market share through word of mouth enhances a company’s revenues without increasing marketing costs.

Companies with the largest market share in their respective sectors usually always have the most competent and devoted personnel. Bringing in the finest personnel lowers attrition and training costs, allowing businesses to concentrate more resources on their core capabilities. Offering attractive salaries and perks is a tried and true method of attracting the top staff. Employees of the twenty-first century, on the other hand, prefer intangible perks such as flexible scheduling and informal work settings.

Finally, purchasing a rival is one of the most certain ways to expand market share. A corporation accomplishes two things by doing so. It taps into the recently bought firm’s current customer base and decreases the number of companies competing for one piece of the same pie. When their firms are growing, savvy managers, whether in charge of tiny enterprises or giant organizations, are always on the lookout for a solid acquisition transaction.

Conclusion

All multinational firms build their success on market share in various areas. China has been a significant market for businesses since it is still a rapidly increasing market for many items. Apple Inc., for example, considers market share data in China as a major performance metric for corporate success.

Between 2018 and 2019, Apple’s market share in China’s smartphone market decreased by 16%, owing mostly to reduced iPhone sales. Existing trade tensions between the United States and China raise the possibility of tariffs, which might increase the cost of goods and reduce the gross margin. Apple’s sales in China fell again in 2020, with the company losing another 8% of its market share due to lower iPhone sales and a poor foreign cash rate compared to the USD.

Lower market shares might indicate that you need to focus on client acquisition, marketing to boost brand recognition, and overall revenue-growth tactics. Higher percentages imply that your current strategy is working, and you should prioritize client retention and product innovation.

Whether your firm is well-established or just getting started, understanding your organization’s industry status is critical since it will assist you in reaching business objectives and achieving the desired success.

Frequently Asked Questions (FAQs)