Market Share: What It Is and the Formula for Calculating It (original) (raw)

What Is Market Share?

Market share is the percentage of total sales in an industry generated by a particular company. Market share is calculated by dividing the company's sales over a certain period by the industry's total sales during the same period. This metric is used to give a general idea of the size of a company in relation to its market and competitors. The market leader in an industry is the company with the largest market share.

Key Takeaways

Investopedia / Candra Huff

Calculating Market Share

A company's market share is its portion of total sales in relation to the market or industry in which it operates. To calculate a company's market share, first determine a period you want to examine. It could be a quarter, a year, or multiple years.

Next, calculate the company's total sales over that period. Then, find out the total sales for the company's industry. Finally, divide the company's total revenues by its industry's total sales. For example, if an American company sold 100millionworthoftractorslastyeardomestically,andtotaltractorsalesintheU.S.amountedto100 million worth of tractors last year domestically, and total tractor sales in the U.S. amounted to 100millionworthoftractorslastyeardomestically,andtotaltractorsalesintheU.S.amountedto200 million, the company's market share would be 50%.

The calculation for market share is usually done for specific countries or regions, e.g., North America or Canada. Investors can obtain market share data from various independent sources, such as trade groups and regulatory bodies, and often from the company itself; however, some industries are harder to measure accurately than others. It also easier to have sales data of public companies more than private ones.

The challenges to calculating market share are even bigger when companies are not pure players in industries and operate in intersections, as is the case for most big tech companies in the last two decades. In those cases, the market share will be calculated for each product and not companywise.

Formula for Market Share

Market Share = Total Company Sales Total Industry Sales \begin{aligned}\text{Market Share}=\frac{\text{Total Company Sales}}{\text{Total Industry Sales}}\end{aligned} Market Share=Total Industry SalesTotal Company Sales​​

Benefits of Market Share

Investors and financial analysts monitor increases and decreases in market share carefully, as this can be a sign of the relative competitiveness of the company's products or services. As the total market for a product or service grows, a company that is maintaining its market share is growing revenues at the same rate as the total market. A company that is growing its market share will be growing its revenues faster than its competitors.

Market share increases can allow a company to achieve greater scale with its operations and improve profitability. A company can try to expand its market share by lowering prices, advertising its products, or introducing new or different products. It can also grow the size of its market share by appealing to other audiences or demographics.

Gains or losses in market share can have a significant impact on a company's stock performance, depending on industry conditions.

Market Share Impact

Changes in market share have a more important meaning in the performance of companies in mature and traditional industries, where there is known and steady growth in line with the general economy. In contrast, changes in market share have less importance with companies operating in growth industries. In these industries, the total pie is still growing, so companies can still be growing sales even if they are losing market share. For companies in this situation, stock performance is affected more by customer and sales growth, as well as profit margins, if applicable, than by market share.

In cyclical industries, which are highly sensitive to the economy's ups and downs, competition for market share can be brutal. In these industries, companies may be willing to lose money on products temporarily to force competitors to give up or declare bankruptcy. Once they gain greater market share and competitors are ousted, they attempt to raise prices. This strategy can work, or it can backfire, compounding their losses; however, this is the reason that many industries are dominated by a few big players, such as discount wholesale retail with stores including Sam's Club, BJ's Wholesale Club, and Costco.

How Can Companies Increase Market Share?

A company can increase its market share by offering its customers innovative technology, strengthening customer loyalty, hiring talented employees, and acquiring competitors.

New Technology

Innovation is one method by which a company may increase market share. When a company brings to market a new technology its competitors have yet to offer, consumers wishing to own the technology buy it from that company, even if they previously did business with a competitor. Many of those consumers become loyal customers, which adds to the company's market share and decreases market share for the company from which they switched.

Customer Loyalty

By strengthening customer relationships, companies protect their existing market share by preventing current customers from jumping ship when a competitor rolls out a hot new offer. Better still, companies can grow market share using the same simple tactic, as satisfied customers frequently speak of their positive experiences to friends and relatives who become new customers. Gaining market share via word of mouth increases a company's revenues without concomitant increases in marketing expenses.

Talented Employees

Companies with the highest market share in their industries almost invariably have the most skilled and dedicated employees. Bringing the best employees on board reduces expenses related to turnover and training and enables companies to devote more resources to focus on their core competencies. Offering competitive salaries and benefits is one proven way to attract the best employees; however, employees in the 21st century also seek intangible benefits such as flexible schedules and casual work environments.

Acquisitions

Lastly, one of the surest methods to increase market share is acquiring a competitor. By doing so, a company accomplishes two things. It taps into the newly acquired company's existing customer base, and it reduces the number of competitors fighting for a slice of the same pie. Shrewd executives, whether in charge of small businesses or large corporations, will have their eye out for a good acquisition deal when their companies are in a growth model.

Market Share Example

All multinational corporations measure success based on the market share of specific markets. China, for example, has been an important market for many companies, as it is still fast-growing. Companies like Apple Inc., use their market share numbers in China as a key performance indicator for the growth of their business.

Apple's market share in China's smartphone market has varied over the years, as it vies with domestic companies there. For instance, in Q2 2024, it had 14% of the market, down from 16% in the same quarter a year earlier.

Why Is Market Share Important?

Simply put, market share is a key indicator of a company's competitiveness. A growing market share can translate into greater profitability due to economies of scale, while a shrinking share can have the opposite effect. Market share can significantly affect stock prices, with any marked change in market share signaling strength or weakness to investors.

What Strategies Are Used to Gain Market Share?

Companies can try to gain market share in a variety of ways. For example, they might introduce new technology to attract customers that would otherwise have purchased from a competitor. They might advertise or market their products more aggressively. Or they might acquire one or more competitors to scoop up their share of the market and narrow the field.

How Do You Measure Market Share?

To determine a company's market share, you divide its total sales by its industry's total sales over a given period. For example, if a company sold 2millionworthofdishwashingliquidandtheindustry′stotalsaleswere2 million worth of dishwashing liquid and the industry's total sales were 2millionworthofdishwashingliquidandtheindustry′stotalsaleswere15 million, the company would have a market share of 2/15, or 13.3%

What Is a Low Market Share?

A low market share is considered to be less than half of the market share of the industry leader. So if the industry leader has a market share of 40% and another company has a market share of 10%, that company would be considered to have a low market share, as 10% is less than 20% (half of 40%).

The Bottom Line

Market share is the percentage of total industry sales a particular company has generated and, as such, serves as an indicator of its competitiveness. A rising market share can signal to investors that a company is worth betting on, while a falling one could be a sign of problems.