MARKET SHARE: Definition, Importance & How To Increase

MARKET SHARE: Definition, Importance & How To Increase
MARKET SHARE: Definition, Importance & How To Increase

A company’s market share is its share of total sales relative to the market or industry in which it operates. 

To calculate a company’s market share, first determine the time period you want to study.  It can be a financial quarter, a year or several years.

Next, calculate the company’s total sales for this period.  Then find out the company’s total industry sales.  Finally, divide the company’s total revenue by the industry’s total sales.

What Is Market Share?

Market share is defined as the share of a sector controlled by a particular company or product.  It is calculated by comparing the percentage of total sales in the relevant market to the revenue of a particular company. 

For example, if the total market sales of chewing gum were 100,000 and your company brought in 10,000, your market share would be 10%.

But is that good or bad in terms of market share?  You can’t tell by looking at individual data.  You really need to figure out what your company’s market share is compared to others in the industry, especially your main competitors. 

Before you can understand what market share is and how to learn from it, you need to clearly define the relevant metrics and benchmark accordingly.

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How Does Market Share Affect Performance Of Companies In Mature Or Cyclical Industries?

Changes in market share have a greater impact on the performance of companies in mature or cyclical industries with low growth rates.  In contrast, changes in market share have less impact on companies in emerging industries. 

In these industries, the total pie is growing, so companies can still increase sales even if they lose market share.  For companies in this situation, inventory figures are more influenced by sales growth and margins than other factors.

In cyclical industries, competition for market share is fierce.  Economic factors play a greater role in the deviation of sales, profits and margins than other factors.  Margins are generally low and operations are performed with maximum efficiency due to competition. 

Since sales come at the expense of other companies, they invest heavily in marketing efforts or even loss leaders to attract sales.

In these industries, companies may be willing to temporarily lose money on products in order to force competitors to withdraw or declare bankruptcy.  As soon as they gain more market share and crowd out competitors, they try to raise prices. 

This strategy can work or backfire by exacerbating their losses.  However, this is the reason why many industries are dominated by a few big players.

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What are the benefits of market share?

Market share increases and decreases are closely monitored by investors and analysts because it can be an indication of the relative competitiveness of a company’s products or services. 

As the overall market for a product or service grows, the company that maintains its market share grows revenues at the same rate as the overall market.  A company that increases its market share will increase its revenues faster than its competitors.

An increase in market share can allow a company to achieve a larger scale of operations and increase profitability. 

A company may try to increase its market share by lowering prices, using advertising, or introducing new or different products.  In addition, it can also increase its market share by reaching out to other audiences or demographics.

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How to Analyse a Company’s Market Share

The company with the largest market share is usually considered the industry leader.  But market share is not a key indicator of a company’s financial health, profitability or growth. 

This is a measure of your competitiveness and gives you a general idea of ​​how you measure up in your target arena.

What does market share mean for your position in the competitive environment?  It shows how the pie is sliced ​​and how big your slice is compared to others.  When you segment your target market, you get a more detailed view. 

Think of each segment as a whole pie and compare how the distribution of portions changes.  Digital companies often use traffic share to gauge their control of the online pie. 

This is especially valuable if you’re running a non-ecommerce site and can’t measure your percentage based on revenue.  Measure your traffic share and segment it just like the market.

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How Is Market Share Calculated?

Market share is calculated by dividing the sales of one company for a certain period by the total sales of its industry for the same period.  The result can be expressed as a percentage.

For example, if Peter Peanut sold $400 worth of peanuts during the year, and the peanut industry’s sales for the same year were $3,000, Peter Peanut’s market share would be $400 / $3,000 = 0.133 = 13.3%.

Of course, some companies offer multiple products that belong to multiple categories.  For example, Apple offers smartphones, computers and digital drives. 

If you wanted to determine Apple’s share of the smartphone industry, you wouldn’t use Apple’s total sales.  Instead, you would divide just their smartphone sales by total (industry-wide) smartphone sales.

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How To Increase Market Share

Elevate your branding and marketing

This is your personality.  If you don’t have it, it’s hard to make an impact.  Connecting with customers is even harder. 

Market share leaders usually have an X-factor brand identity and marketing advantage that makes them stand out.  Think: Tesla, Ikea and McDonald’s.  These brands are well known.

It is important here to develop a coherent brand strategy that embodies your mission, your vision and your message.  When you develop a cohesive design and voice that reflects it all, and consistently present it to your audience, you’ll make a lasting impression.

Add discounts, benefits and incentives

Review your current pricing structure and compare it to your competitors.  Discounts, bonuses or additional benefits can be an additional incentive for consumers to buy. 

For example, in e-commerce, companies that offer free shipping usually have an advantage, even if it means adding an extra product to the cart to meet the minimum.  Find your competitive advantage.

These techniques can boost your business when competition is fierce or you’re not growing as much as you planned.

Grow your customer base

Follow up with your customers.  Yes, your existing customers.  Your existing customer base creates your market share.  To maintain this, you need to stick with it and treat each customer as an investment. 

Turn your target audience into loyal customers by making them feel appreciated, engaging with them, and most importantly, listening to them.

Consider an acquisition

You can increase market share by acquiring a company that is a good match for your own products or services.  This requires a little research, but will potentially lead to a larger market share in the end.

Companies usually buy companies to gain more market share or to expand their product portfolio.  For example, Microsoft owns LinkedIn and GitHub. 

While the first (LinkedIn) can lead to an increase in the market share of social media revenue, the second (GitHub) can lead to an increase in the market share of Cloud OS revenue.

Market Share In Business Plan

The resulting market share is the basis of the revenue forecast in the financial forecast of the business plan, and therefore it is important that the market share estimate is supported and justified by the marketing plan.

SOM is not usually calculated using a bottom-up approach, but it is a useful exercise to perform the calculation to see if the business is capable of performing at the level determined by the estimated market share.

For example, in the market size section, estimates were obtained for SAM of 4.5 million in the first year and increased to 7.59 million in the fifth year. 

Based on available resources (personnel, equipment, financing, etc.), the company can estimate that it can serve 300 customers in the first year and 1,600 customers in the fifth year. 

Using an average per customer of 150, this equates to revenue of 45,000 in the first year and 240,000 in the fifth year, or a 1% increase in market share to 3.2%.

Clearly, if a company has estimated market share much higher than this, it needs to revise its business plan.

Conclusion

Market share also depends on your business.  A global market share of 1% is nothing to brag about for a company that sells products to the global market.  But if you target just Texas, that’s an impressive number, and you can even be the leader in your local market.

As a local supplier, you should consider benchmarking against comparable companies in other regions.  Choose companies of similar size with equivalent audience demographics.  This allows you to gauge whether your market share is average for your type of business, extremely high, or low.

Market Share FAQs

What Is The Formula For Calculating Market Share?

Once you’ve identified your market and what you’re going to gain by measuring your share, you divide your business revenue (traffic) by your industry’s total revenue (traffic).  The result is your market share.

Why Do You Need To Increase Your Market Share?

Market share is usually estimated for a fiscal year or quarter.  Market share tracking helps you measure your company’s growth by examining your progress relative to overall market growth.  A prosperous company’s market share will grow faster than that of its competitors.

Is Market Share An Indicator Of A Company’s Success?

Market share is one of the effective indicators of a company’s success, but not the only one.  A company’s market share can be affected by several factors, including the company’s marketing and sales strategies, the quality of its products or services, the company’s customer service, the company’s pricing, company branding and advertising, economic market conditions, and competition.  A company’s market share can also be affected by external factors, such as government regulation.

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