What is Market Share?
Market Share is defined as the the percentage or portion of a sale of particular product or products out of the total sales in that market or segment serviced by competitors over a specific period of time. This definition can be represented in equation form as:
Market Share (MS) = Sales of the Company/Total Market Sales
The percentage or portion can be about a particular product or a range of products. If the portion is about one specific product, it must be compared only to the total market sales of the competitors only in that particular product. If the portion refers to a range of products or whole segment, it must be compared to similar range or whole segments of the competitors.
Carlton O’Neal defines market share as the percentage or proportion of the total available market or market segment that is being serviced by a company.
How to calculate Market Share?
A company sells 500 Laptops worth of $250,000, where as the total industry turnover is 6000 laptops worth $3000000. The company market share is calculated as under.
500/6000 = 0.083*100= 8.33%
Or $ 250,000/30, 00,000 = 0.083*100= 8.33%
8.33 % represents markets share of the company in the overall market.
Example of Market Share
We can use the Search Engines share of the market as practical examples. There are billions of searches across the internet. Users use search engines to find relevant information. There are several search engines providing the service to users. Each search engine captures a portion of users to use their service. This portion of users out of the total users is the Market Share of a search engine. Here is the actual Market Share each SE captures.
The Importance of Market Share
The company’s own sale revenue may not be an excellent indicator of its performance against its competitors. A company might be doing well in a segment by generating profitable sales, yet it may be under performing in relation to the overall market potentials. This is only possible if a firm accurately calculates is market share. It is important to know the percentage out of the whole market served by the competitors to formulate plan to further increase its share. It is a relative measurement taking into account external benchmarks. It is one of the most important and effective metrics.
Reasons to Increase Market Share
As explained above, a firm’s potential revenue can grow if it increases its portion of performance against the competitors. Here a few reasons why a company should increase its Market Share.
- Economies of Scale: Once the break even is achieved and the company is already making profit, an increased production will reduce the cost and hence generate more revenues.
- Brand Recognition. A company may get higher reputation by increasing its share.
- Cheaper Inputs: For more production, the company shall need to buy larger quantities of inputs and so negotiate on lower prices. In other words, it will make the company more powerful in the face of suppliers.
- Access to New Products. The more a company sells, the more chances to invest in new products.
- Increased Profitability. A firms increases its profit by selling more and generating more revenues. According to PIMS study by the Strategic Planning Institute, it was found that companies with larger share of the market enjoyed a rate of return three times higher than those of smaller businesses.
Increase in Market Share is Not Always Desirable
There are many situations where it is not in the interest of the business to increase its market share.
- Loss on Return. A firm may not be able to achieve a good rate of return on a product. In such case, an increase in market share shall mean incurring more loss.
- Higher Costs. The economies of scale, as mentioned above, may not be realistically achievable. It may require the company to put higher budgets for promotions to capture extra share. This may result in higher costs and low profitability.
- Risks from Competitors Strategy. Other competing business might find losing their share and try to regain it by strategies like drastically reducing the prices. This may result in unhealthy practice of price wars.
Market share represents the actual portion of a company sales out of the total sales in a particular market. It is an important and effective metrics to use along with other marketing metrics. At times, it may be even more effective than other metrics such as ROI. It is through market share that a company may know its real chunk of the potential market. Knowing MS helps businesses to know the opportunities to invest more and increase their profitabilities. Increase in market share results in the achieving the economies of scale and the growth of profitability. However, increase in MS may not be always desirable due to a number of factors.
Tips to Remember the Main Points
Portion of the market
Total Share of the Market
Importance of Market share
Economies of Scale
Not always desirable