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What is Market Share?
Market share is the amount of revenues that a company generates compared to that of the total revenues for that market. But what makes up a "market?"
A market is the collective of all companies offering the same or similar products and services. It can also be companies serving the same or similar customers. A market area can be further broken down by one or more of the following marketing demographics:
- Individual product categories or models sold in the area
- Type of region (city, suburban, rural, residential, retail, industrial or commercial)
- Type or size of business served (small business, large corporation, etc.)
- Age (of consumers or businesses)
- Household dwelling type or size
- Or any other demographic that helps to define the subject market
Calculating Market Share
Market share is calculated by first determining the total revenues for the particular market being studied. Determining this figure can be the most difficult part of the calculation. This figure can be obtained by the following methods:
- Primary research. A company or organization can hire a consultant or research firm to study a market and determine its size and revenues. Consulting firms can also do these studies on their own and sell the research.
- Industry associations. Many industry associations commission studies of this type regularly for their membership. This research may be posted for public use, for members only or it may be available for a fee.
- Government studies. The U.S. Census Bureau, Small Business Administration and other national, regional and local government agencies regularly do research of markets for economic planning and reporting purposes. Many of these studies are available online for free.
Since any of these studies are done annually or less often (some major census studies are only done once a decade!), total market revenues are often a rough estimate. Using the most recent and reliable data available helps improve the accuracy of the estimate.
Once the total market figure is determined, the formula for determining a particular company's market share is simple and straightforward:
Company's Annual Revenues ÷ Market's Total Annual Revenues = Company's Market Share
How to Calculate Market Share
A quick and easy formula for calculating market share is:
Company annual revenues ÷ Total market annual revenues = Company's market share
Why is Market Share Important?
Market share, comparative to the total market, can be a determinant of whether a company is growing, stagnating or losing ground. Though it can be done more frequently, an annual review is usually sufficient for most small to medium sized businesses.
Knowing how competitors rank and how much of the market they control should also be considered to determine how viable it would be to pursue a greater share, as well as what marketing strategies would work best.
- One or Few Dominant Competitors. In many markets, there are a few dominant players (sometimes just one!) who command the greatest share of total revenues. In this scenario, smaller businesses are unlikely to have the resources to gain significant ground and may often be unable to compete on pricing. These smaller players would be better advised to pursue a niche marketing strategy to differentiate themselves. Example: Discount retailing where mega retailers Wal-Mart, Target and Amazon command large shares of the market.
- Many Equally Matched Competitors. When the majority of businesses in a market are equally matched in terms of resources, size, offerings, marketing approach, etc., the market share distribution could be quite evenly distributed as well. Minor changes in market share can be a huge issue and will likely be monitored closely. Because of the similarity among competitors, customers can often quickly and frequently hop from competitor to competitor. Therefore, marketing programs encouraging brand loyalty can be helpful. Example: Cellular phone providers which all offer the same phone devices and services.
- Large Number of Competitors Without Significant Market Share. In these markets, there may be hundreds or even thousands of micro or small businesses competing. Their offerings may be similar or completely unique. Competitors may not even be monitoring (or caring about) market share. Marketing strategies usually focus on their unique business model, products, personnel or other factors.... and may not even address how they compare to their competition. Example: Individual crafters selling online.
Market Share Ranking
One of the other measurements of market share done by researchers or associations are studies ranking various competitors in a particular industry or market. The data can be either collected from public sources or from surveys.
This information helps everyone in the market understand where they rank and what it might take to move up the market share ladder. Example: A company who has the third largest market share would know what revenues the number one competitor has, helping them create a sales goal that could help them move closer to the top spot.
This is more than just an egotistical pursuit. Companies who have higher market shares and revenues are much more likely to survive and sustain their participation in the marketplace.
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© 2013 Heidi Thorne