Terms

Market Share What It Is and the Formula for Calculating It

Market Share What It Is and the Formula for Calculating It

Market Share: Understanding and Calculating

Market share represents the percentage of total sales generated by a company within an industry. It is calculated by dividing a company’s sales by the total industry sales during a specific period. This metric provides insight into a company’s size and position relative to its competitors. The market leader is the company with the largest market share.

Key Takeaways

  • Market share represents the percentage of total sales earned by a company within an industry.
  • To calculate market share, divide a company’s sales by the industry’s total sales.
  • Market share gives an indication of a company’s size and competitiveness.
  • The market leader is the company with the highest market share.
  • Strategies to increase market share include implementing new technologies, generating customer loyalty, and acquiring competitors.

Calculating Market Share

A company’s market share is determined by its portion of total sales in its market or industry. To calculate market share, select a specific period, such as a quarter, year, or multiple years.

Next, calculate the company’s total sales during that period and the total sales of the industry. Finally, divide the company’s total sales by the industry’s total sales to obtain the market share percentage. For example, if a company sold $100 million in tractors last year domestically, and the total amount of tractors sold in the U.S. was $200 million, the company’s U.S. market share for tractors would be 50%.

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Market share calculations are usually done for specific countries or regions, such as North America or Canada. Data for market share can be obtained from independent sources, trade groups, regulatory bodies, or the company itself.

Formula for Market Share

Market Share = Total Company Sales / Total Industry Sales

Benefits of Market Share

Investors and analysts closely monitor changes in market share as it reflects a company’s competitiveness. Maintaining market share indicates revenue growth at the same rate as the overall market. Increasing market share allows a company to improve profitability and achieve greater economies of scale. Companies can expand their market share through price reductions, effective advertising, product innovations, and appealing to new demographics.

Market Share Impact

The impact of market share varies depending on the industry. In mature or cyclical industries with low growth rates, changes in market share have a significant impact on company performance. However, in growth industries, companies can still experience sales growth even if they lose market share as the total market size is expanding. For companies in cyclical industries, competition is intense, and sales, earnings, and margins are heavily influenced by economic factors.

In some industries, companies may strategically invest in marketing or offer loss-leading products to gain market share and force competitors to exit the market. Once dominant, these companies may raise prices. Industries like discount wholesale retail are often dominated by a few major players.

Strategies to Increase Market Share

Companies can increase their market share by offering innovative technology, fostering customer loyalty, hiring talented employees, and acquiring competitors.

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New Technology

Introducing new technology can attract customers who switch from competitors and become loyal customers, contributing to increased market share.

Customer Loyalty

Building strong customer relationships and delivering positive experiences can result in customer loyalty and positive word-of-mouth referrals, which help grow market share.

Talented Employees

Hiring skilled and dedicated employees allows companies to reduce turnover costs, focus on core competencies, and improve operations. Competitive salaries and intangible benefits can attract top talent.

Acquisitions

Acquiring competitors reduces competition and expands the customer base. This strategy helps increase market share and drives further growth.

Market Share Example

Market share is a crucial measure of success for multinational corporations, especially in rapidly growing markets like China. Apple Inc. tracks its share in the Chinese smartphone market as an important performance indicator for the growth of its business.

For example, Apple’s market share in China’s smartphone market was 14% in Q3 of 2022 and increased to 21% in Q4 of 2023.

Conclusion

Market share provides valuable insights into a company’s size, dominance, and competitiveness. It influences a company’s performance, scalability, and pricing strategies. Increasing market share involves implementing new technologies, delivering high-quality products, effective marketing, acquiring competitors, and building customer loyalty.

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