Last Updated: Jun 13, 2022 Value Broking 9 Mins 1.4K

To calculate the market share let us first start with understanding market share.

What do you mean by Market Share?

Market share is the proportion of the total industry sales generated by a single company or corporation. It is represented as a percentage of the entire industry sales. The market share is an important metric used by data analysts, investors, and other professionals to compare a company or corporation with its competitors. Looking at the company’s market share, one can gauge the size or strength of a company relative to the competition. 

The percentage of users or customers who utilize a given product or service is referred to as market share. The number of users or customers who use a specific product or service divided by the total number of users or customers in a market is a common way to calculate market share. In other terms, market share refers to the percentage of users or customers who utilize a certain product or service compared to the total number of users or customers in a market. The most frequent way to express market share is as a percentage, such as 90 percent, 50 percent, or 80 percent.

The company with the highest market share is the biggest and the most dominant in the industry. The world’s leading corporations have a very high market share in their respective industry, which makes them market leaders in that industry. Pie charts are widely used to represent the market share of different companies. Now you have understood what the market share is? Now let’s discuss how to calculate the market share in detail.

How Do You Calculate  Market Share?

Market share calculation: There are two methods to calculate the market share of a company. The more widely used method to estimate the market share is using the total revenue generated by the company. In this method, the total revenue generated over some time is considered. This period is generally a fiscal year, but it could be a fiscal quarter or a combination of many budgetary years. This revenue is then divided by the total revenue generated by the industry over the same period. 

The total revenue figure of the company can be obtained from the company’s annual reports or other publicly available reports and business papers, in the case of listed companies. Whereas the revenue generated can also be obtained from Industry reports, financial and business documents, or, in some cases, from its annual report itself. 

The second method of calculating market share is using the company’s total number of units sold. In this method, the total number of units sold by a company over a fiscal period is divided by the total number of units sold by the industry over the same fiscal period. The term “unit” could denote the company’s product or service. The number of units sold by the company and the industry can be available from the company’s annual report, industry report, economics papers, and channels. 

Even though a company might have sold the highest units in the industry, it might be far from generating the highest revenue. In the same sector, the company with the highest market share based on sold units will not always have the highest market share based on sales revenue. It is mainly seen in the case of more premium goods and services.

Market Share Example

Assume a smartphone manufacturing company generates revenue of Rs. Forty lakhs from the sale of phones in a fiscal year. That same year, the smartphone industry generated Rs. 1 crore from phone sales. Then applying the formula to calculate the market share using sales revenue, the company’s market share is 40%. 

Now the same smartphone company sold only 50 units, and the total number of phones sold by the different companies in the industry is equal to 500. Then using the method to find a market share of the company based on the number of units sold, the company’s market share is only 10%. 

In the first case, the company could be seen as a clear market leader and possibly have the highest market share as it accounts for 40% of the total market share. In the second case, it is less likely to have the highest market share in the second case. However, in other industries like the soda industry, the company cannot charge a high premium for its product. The company with the highest market share in revenue is likely to be the highest in units sold. In the soda industry, all the different brands sell their product at a similar price, if not the same price.  

Investors usually prioritize financial figures over raw numbers while comparing a company with its competition. Based on the nature of the business, analysts and investors use either or both methods to calculate the market share. However, a business may still figure out its market share using both ways to help plan new business strategies. 

Significance

Simply defined, a company’s market share is an important indicator of its competitiveness. Market share can improve a company’s profitability. It’s because as businesses develop in size, they are able to scale as well, allowing them to provide lower pricing and limit the growth of their competitors.

Companies may even go so far as to lose money in some sectors in order to push out opponents or drive them into debt. After this, the company can expand its market share and raise prices higher further. Market share can have a big impact on stock prices in financial markets, particularly in highly competitive industries where margins are tight and competition is severe. Any significant variation in market share can cause business confidence to sag or strengthen.

How can a business expand its market share?

Offering breakthrough technologies to clients, building customer loyalty, attracting brilliant workers, and gaining a competitive advantage are all ways for a company to grow its market share.

  • One way for a corporation to gain market share is through new technology innovation. When a company introduces a new technology that its competitors do not yet provide, customers who want to possess it buy it from that business, even if they initially did commerce with an opponent. Many of these customers stay loyal fans, increasing the firm’s financial performance while decreasing the company’s market share they switched from.
  • Companies maintain their current market share by improving customer connections and preventing current consumers from making the switch when a competitor launches a trendy new offer. Even better, companies may increase market share by adopting the same basic strategy, as happy consumers frequently tell their friends and family about their pleasant experiences, giving rise to new customers. Gaining market share through word of mouth boosts sales profits without increasing marketing costs.
  • Employees in businesses with the biggest market share in their respective sectors are almost always the most talented and dedicated. Bringing the finest workers on board minimizes costs associated with turnover and training, allowing businesses to spend more resources on their core capabilities. One established strategy to recruit the top staff is to offer competitive salaries and perks. Employees of the twenty-first century, on the other hand, are looking for intangible perks like flexible scheduling and casual work settings.
  • Finally, obtaining a competitor is one of the most reliable ways to expand market share. It leverages the recently bought firm’s current client base while also reducing a lot of firms’ excessive for a piece of the same pizza by one. Further, when their firms are in a growing phase, savvy executives, whether they be in charge of tiny businesses or giant organizations, are always on the lookout for a solid acquisition transaction.

Advantages of Market Share

Market share is one of the key metrics investors consider while analyzing a business. Before investing, an investor would want to know its position relative to its competitors in the industry. Calculating the market share allows investors to understand how much the industry is dominated or captured by that company. The company also uses the market share metric to evaluate its performance against its competitors in a specific fiscal period. 

Companies are always looking forward to increasing their market share because they can generate more cash flows by capturing more of the market and generating more cash flows. This cash can then be re-investible, and the company can expand in size and, in turn, gain even more market share. They can then look to reduce expenditure and increase efficiency, leading to an increase in profitability. 

The company can successfully increase its market share by introducing new technologies to boost and optimize production. The company also needs to have good management. The management sets goals for the company and guides the employees to achieve them. To retain customers, the company needs to innovate new products or deliver the highest quality services constantly. And lastly, the company should reinvest the money generated from its business into activities that will help expand the business. 

Conclusion

Companies aspire to grow their market share to become market leaders in the industry. These market leaders have very high brand value, and many times customers tend to stick with the brand for a long time. The market leaders are always looking to retain market share, while smaller companies aspire to gain market share from the leaders. If a single company acquires too much market share compared to the competition, it can lead to a monopoly. 

Here, the entry barriers are very high, and only through technological disruption or government regulations can a new company gain market share from a monopoly. Whereas if there are too many companies competing with each other, no company has an established brand. Eventually, one or multiple winners could emerge in such markets. The barriers to entering a fragmented market are usually low. However, its product or service has to have the edge over its competition to increase its market share.

Frequently Asked Questions (FAQs)

Market share is the proportion of the total industry sales generated by a single company or corporation, represented in percentage.

To calculate the market share of a company, you take its total sales revenue for any fiscal period and divide it by the total sales revenue generated by the industry of the same fiscal period. To calculate the market share based on the number of units sold, one can simply use the total units sold in place of the total sales revenue.

By analyzing the market share of various companies in the industry, investors can analyze its performance relative to its competitors and the industry. Investors can get an idea of the company’s current influence in the industry.