For a person with some knowledge of business terminologies, Market Share is a familiar term, even for mid to low-level managers. They understand the importance of Market share in the success journey of business. But, very few of them understand exactly what market share is. In short, the Market share is the percentage of contribution of sales of the product of a company towards the total sales within the industry.
Market share is defined as the proportion of total sales of a company during a specific period relative to the total sales pertaining to the industry during the same period. Here, total sales may be measured by volume or value. Volume refers to unit share. Value refers to revenue share.
Unit Market Share = (Total number of units sold by company/Total number of units sold in the industry) x 100
Revenue Market Share = (Value of company’s total sales/Value of total market) x 100
The simple steps involved in calculating the market share of a company are explained below.
– Determine the period to examine. It might be a Fiscal quarter or a year or multiple years.
– Calculate the company’s total sales over that period.
– Identify and note the total sales of the company’s industry over that period.
– Proportionate the company’s total revenues and industry’s total sales for that specified period.
How to define the Market?
- Selecting an appropriate market for comparison is a key element of market share analysis. There are several ways to define a market.
2. Regional Market
3. Product category
- In the market share, competitors are the key parameters to calculate the market share. For example, a German manufacturer of luxury cars could define their market as the entire global transportation industry but this is probably too broad to generate a meaningful metric. As such, they might compare their sales to their four largest competitors or define their market as the “European market for luxury cars”.
Facts and Factors
– The diversified products that a firm sells compared with the number of products of the same type that other companies sell.
– Increasing market share is not always desirable. If the production of a company is close to its maximum capacity, plans to produce over the capacity is a mere investment in additional capacity. In case, if the extra capacity is not fully utilized, costs will be relatively high.
– Also, promotional activities and advertising expenditure also affect the company’s profits.
– To regain the share, rival companies and competitors start a price war attempt.
– The possibility and probability of analyzing the market share over multiple periods to see how well a company performs against its competitors.
In the end
Market share is not the end point that demonstrates everything that an investor must know. It just gives an insight into which one firm’s product outperforms or fails to compete against the rest of the field. To use Market share effectively, you should write down your assumptions and make sure you compare “apples with apples.” Always be cautious of market-research reports which often lack explanations of how the market calculation was done. Do a fact check on the Market Share before investing in the firm.