Market share is the total sales earned by a company within that particular market industry. It is a way for companies to measure how well they are doing compared to their competitors.
To calculate the market share of a company, one would look at the sales within that company at a particular moment of time; for example, a quarter or fiscal year. The goal of most businesses is to increase their market share, or value, within their industry.
How Does Market Share Work?
Market share represents the percentage, or portion, of the market a company earns. It looks at the total sales of the company in relation to the overall industry sales of all other companies that operate within the industry.
Imagine you are looking at purchasing decisions of consumers for 100 vehicles. One certain vehicle manufacturer sells 60 of the vehicles.
This means that the particular vehicle manufacturer holds 60% market share. Although this is a simplified example, it helps provide a visual example of market share.
Going further in depth, when calculating market share it not only looks at the company’s sales, but it looks at a specific period of time and the total sales within the industry over that period.
How Is Market Share Used?
Market share provides a valuable metric that delivers insights into the size of an organization within the market that it operates in. It allows both the companies, competitors, and investors to evaluate the company and its place within its respective industry.
With companies that are in industries that are cyclical or mature (where there is low growth), changes in market share can show a larger impact on the company’s performance. On the flip side, companies within growth industries will likely see continual fluctuations.
The “pie” itself is expanding, so even if the company is increasing in sales they might be losing market share.
How to Calculate:
The formula for market share is not a complicated one:
Market Share = (Total Company Sales/Total Industry Sales) x 100
This percentage will give you the company’s position within the industry. It’s helpful for the company to know so they can measure up their competitors, and for investors to know so they can determine if the investment in the company is worthwhile.
Why Is It Important?
Market share is important for companies. It allows them to determine how successful they are in relation to their competitors. It can help determine if their advertising, marketing, or new products were successful and adjust accordingly if need be.
For consumers and investors you are able to monitor companies’ increases and decreases of market share. It allows you insight into the competitiveness of the company’s services or products.
Understanding if a company is maintaining its market share or growing faster than competitors is a valuable tool.
What Is an Example of Market Share?
While a simplified example of market share was provided above, this example will go into further detail.
When you hear the name Tesla you likely think of the leader in EV (electric vehicles). But Tesla’s grip on the EV market is slipping.
From January 2019 to now, Tesla’s EV market share has dropped from 29% to just 11%. Why is this?
Tesla was one of the leaders that pushed the industry forward. It is a household name.
However, as the global EV market continues to expand, Tesla is not the only leader in the running any further. And as the global EV market will only see continued growth as the vehicle manufacturing industry transitions toward more electric offerings.
That means that holding larger percentages of market share will continue to make Tesla competitive within the global EV market.
How To Increase Market Share
Companies that want to continue dominating their industry can use the following tactics to increase market share. However, depending on the industry — especially a growing industry like global EV — the companies may have to deploy more than one of these tactics.
Increase Customer Satisfaction
One of the best ways to increase market share is to increase customer satisfaction. Companies should focus on working with existing customers to improve relationships.
Exceptional customer experiences will create loyalty. And loyal customers are more than likely to become repeat customers and tell their friends and family about the product/service.
Another way a company can flourish is to provide the same quality/service as their competitors, but at a lower price. It’s a quick way for a company to rapidly expand market share.
However, this is not an option for all companies. Depending on the brand, it might not be interested in competing with others.
After all, a luxury fashion designer will not compete with a lesser valued clothing manufacturer. Instead, they need to market on the value that they provide, without lowering prices.
Build Brand Awareness
On that note, it is important to build brand awareness to increase market share. When businesses advertise and market appropriately, they will begin to see an increase in revenue.
Having their name easily recognized as a leader in their industry can help increase a company’s market share.
Types of Market Share
Value and volume are the two types of market shares that businesses and investors should be familiar with. Both are important in assessing the company’s status within its individual industry.
Volume Market Share
Volume market share represents the number of units the company has sold in comparison to the total number of units sold in the industry within the given time period. For example, if the company sold 1000 units, and the industry as a whole sold 20,000 units, the volume market share would be 5%.
Value Market Share
Value market share represents the total sales accumulated by the company over a period of time in comparison to the other companies within the industry. For example, if a company had $15,000,000 in sales and the industry as a whole had $100,000,000 in sales, this company would have a value market share of 15%.
Benefits of Market Share
Having a high market share is advantageous to companies because it puts them at a competitive advantage. It also allows them to scale operations, increase sales and profitability, and expand their customer base easier than their competitors.
Additional Bargaining Power
Companies that have high market share dominate their industry. With this dominance comes advantages to receive better prices from their suppliers since they have a larger volume of orders.
Increased Economies of Scale
Increased market share also allows these companies to have a decrease in the cost to produce their products. They can operate at a greater scale which in turn increases profitability.
This adds another cost advantage over competitors.
Having a high market share also helps the company widen its base. As we mentioned above, a loyal consumer base is a great way to increase other consumers to follow suit.
The increase in consumers goes hand in hand with improved sales. As the market share increases, the sales of the company continue to rise.
As brand loyalty and word of mouth spread, the profit will only continue to increase.
Understanding Market Share to Improve Investments
If you are a business owner, understanding market share is a valuable tool for your business to stay competitive. If you are an investor, understanding market share is a valuable tool to help ensure your portfolio is filled with competitive companies.
No matter who you are, a financial advisor is a great resource to use. They can help you understand market share and how it pertains to you and your business and/or portfolio.
They will help meet your objectives and help you reach success.