What is Market Share?
Market share is the portion of total sales within an industry that a specific company captures.
It is expressed as a percentage: a company’s sales as a percentage of total industry revenues. The larger a firm’s market share, the more revenue that goes into their pockets. Firms with smaller market shares capture a smaller portion of total sales.
To determine the market share of a specific company, first select a measurement period. The period can be anywhere from a fiscal quarter to a year to industry-specific revenues over the course of a decade.
Once a measurement period has been selected, determine the company’s total revenues stemming from sales within the industry of interest and within the measurement period. It is not uncommon for larger corporations to have business units that operate in a variety of industries, so this is something to be mindful of.
To calculate market share, compare the company’s sales in the industry to the total sales in that industry for the same period, by dividing the company’s relevant revenue by the total industry revenue.
For example, a popular widget manufacturer has recorded $2 million in revenues over the course of a single fiscal year.
In that same fiscal year, the widget industry as a whole saw $20 million in sales. Dividing the manufacturer’s revenues for the period by the industry’s sales yields a market share of 10 percent ($2 million divided by $20 million).
Why Calculate Market Share?
The market share calculation is primarily a way to produce a better understanding of a company’s size relative to an industry as a whole.
Internally, the widget manufacturer from the example above can use this calculation as a success metric in determining if they have been meeting their growth and expansion goals.
If revenues have increased, but market share has stayed the same, that means that the market itself is expanding and growth is relatively flat despite increased widget sales.
Market share can also be used by firms to compare themselves to competitors, or for outsiders to compare two similar companies in a single industry.
Using the same industry and measurement period, calculate the market shares for two competing firms.
While there are many factors that produce competitive edge, size of market share is an important determinant in understanding which companies have access to larger swaths of the market, and therefore are likely have access to more resources.
This direct comparison can also be made over multiple periods or at intervals to measure how companies have fared against one another and how they have grown or contracted within their industries.
Market share calculations over the same measurement period for companies that operate in different industries can also be compared, painting a picture of the ways in which those firms’ business units are shifting and where their strategic focuses lie.
For Small Businesses and Entrepreneurs
For entrepreneurs, market share calculations are often the basis of a comprehensive business plan.
Potential investors can use these calculations to understand the scope of competition within an industry to see whether it is dominated by a few power players or widely distributed among a variety of smaller firms.
The nature of a new business and the industry it will be operating in are both factors to consider when assessing competitive level, along with the specific goods and services that will be offered.
For example, a disruptive business model stands to benefit from a market that is widely distributed. In theory, it will be easy for such a business to attract market share from numerous firms and consolidate customers.
Niche business models would struggle in this environment, due to the wide range of competition. In an industry that has relatively few firms, niche offerings can thrive on cast-off customers who are in search of a tailored fit or a different approach. In this way niche business models compete less directly with power players.