Market Share: Definition, Formula & Example

What is Market Share

Market share is the amount a business owns of a market, based on its total revenues as a percentage of the market as a whole. In other words, it measures the firms relative position in the wider market when compared to competitors.

We can calculate a firms market share by dividing the companies total revenue by that of the overall market. For example, a company makes sales of $20 million. The total sales of the overall market is $100 million. So we would take the individual firms total, $20 million, and divide by the markets revenue, $100 million. This would therefore equal a market share of 20%.

It is an important concept to use as it can indicate a firms positioning in the market. For instance, a firms share of the market can change from year to year. If the firm isn’t maintaining its same position, it is falling behind the market average. At the same time, it can provide an indication of how much power certain firms have. For firms that own 20% of the market, it will have significant power over setting prices and determining industry standards.

Importance of Market Share

Market share is an important concept and has many various uses including:

1. Competitive Positioning: Provides decision makers with an indication on the firms overall positioning within the market. A high market share can suggest the firm is doing well, whilst a low share may suggest room for improvement.
2. Strategic Decision Making: By identifying the firms position within the market, strategic decision makers will be able to better identify a plan. This includes areas such as product development, pricing, and marketing. For example, if a company has a low share of the market, it may need to consider more marketing to help with brand awareness. Alternatively, if it has a high share of the market, it may be best to look at how it can maximise profit margins.
3. Investor Confidence: If a company is gaining ground against its competition, it will help to boost investor confidence. For instance, if a firms share of the market is increasing year on year, it shows it is doing better than the market average. Even if the firm is not performing well, if it is still outperforming the competition, it may maintain investor confidence.
4. Industry Analysis: By identifying a firms share of the market, businesses can better understand which markets are growing and which are in decline. This may suggest changes in consumer behavior, or the development of new competitors. As a result, businesses can better analyse and identify opportunities or threats which it may experience.

As we can see, a firms share of the market can tell its own story. It is the basis by which businesses are able to develop a strategy and build on how it wants to position itself within the market. This is important in an ever changing world as competitors come and go.

Market Share Formula

We can calculate a market share using the formula below:

To use the formula, we need to identify how much a company has sold within the year, as well as the revenue of the market as a whole.

For example, let’s say Walmart makes $150 billion in grocery sales. If the overall groceries market is worth $500 billion, we can calculate its share of the market below:

($150 billion / $500 billion) x 100% = 30%

We can therefore conclude from this example that Walmart owns 30% of the overall groceries market.

Market Share Example

If we take an example, we can look at three hypothetical companies – A, B, and C. They all operate within the same market, which has total sales of $1 billion. Company A has sales of $200 million, Company B with $150 million, and Company C with $300 million.

To calculate each companies share of the market, we can use the formula as per below:

Company A = ($200 million / $1 billion) x 100% = 20%

Company B = ($150 million / $1 billion) x 100% = 15%

Company C = ($300 million / $1 billion) x 100% = 30%

Based upon the above, we can see that Company C has the highest share of the market at 30%. It is closely followed by Company A with 20% and Company B with 15%. So with this information, each company is able to identify their position in the market and take strategic decisions accordingly.

Types of Market Share

Tracking a firms share of the market can come in different forms. Let’s look at them below:

1. Overall: This is the firms total sales in the market compared to that of the entire market as a whole. It is the most common type.
2. Segment: This calculates the share of a specific group within the market. For instance, age, gender, race, or income level. Perhaps the company is doing well for those aged 65+, or they appeal more to women over men.
3. Geographic: The percentage of sales a firm earns from a specific geographic region. This might be town, city, state, country, or continent.
4. Relative: The share of the market which a firm owns, relative to its biggest competitor.
5. Brand: This is the percentage of sales or revenue generated by a specific brand compared to the total sales or revenue of that product category.
6. Share of Wall: The percent of a consumer’s total expenditure that is spent on a specific brand or product.

Market Share Advantages

Some of the advantages of knowing a firms share of the market include:

1. Increased Brand Recognition: when a firm has a high share of the market, it can be considered a leading player. This means that it already has a high level of brand recognition and awareness. In turn, this helps its ability to retain and gain customers.
2. Greater Economies of Scale: When a company owns a significant part of the market, it is better able to benefit from economies of scale. It can negotiate better prices with suppliers, reduce production costs, and maximise the price to consumers. This is all thanks to the powerful position it has in the market.
3. Greater Bargaining Power: not only can firms negotiate better prices with their suppliers, but are also able to better negotiate with its buyers. For instance, brands such as Coca-Cola can get better deals for their suppliers, but also better prices on selling to retailers.
4. Improved Customer Loyalty: firms with a large presence and brand awareness are likely to benefit from brand loyalty. If there is trust in the brand, it can become difficult for some consumers to move to other smaller rivals.
5. Greater Pricing Power: when a firm has a high share of the market, it is able to better set prices. Consumers are often willing to pay a higher premium to leading brands which have their trust. In turn, it can lead to higher profit margins.

Market Share Disadvantages

Although having a high proportion of the market can provide some advantages, it also comes with some disadvantages, including:

1. Increased Regulatory Scrutiny: when a firm has a large share of the market, it is treated with greater regulatory scrutiny. Due to the market power it owns, regulators will look to exert more control over them in a bid to protect consumers.
2. Complacency: those companies which own a large part of the market can often become complacent. It is easy enough for big companies to continue what has made them successful for many years. However, technology and consumer demands change. Those that fail to innovate will fall behind.
3. Vulnerability to Economic Downturns: Big firms often have higher fixed costs, which become more costly during recessionary periods. This can disproportionately effect them during economic downturns as consumer behavior tends to change. Those fixed costs are still there, but the demand is not – thereby reducing profit margins.
4. Reduced Customer Choice: When there are a few firms which own the vast majority of the market, it can squeeze small competitors out of the market. They may not be able to benefit from lower production costs and therefore will have to find niche markets to compete. For instance, the grocery market tends to be saturated throughout the world, which makes it extremely difficult for any new competitors to enter the market.
5. Greater Risk of Antitrust Actions: Those companies with a high level of market influence are more prone to antitrust actions. They are often the focus of the attention and any untoward behavior is used to set an example to other companies in the market.

Having a high share of the market is undoubtedly a good thing. It shows that the company is doing well. However, it is important to acknowledge some of the drawbacks and therefore look at ways to mitigate these issues. This might come in the form of investing in innovation, diversification, and maintaining strong regulatory standards.

How to increase Market Share

Increase a firms share of the market is one of the key objectives for business owners. Here are some ways businesses look to increase their presence in the industry:

1. Improve product quality: sometimes the goods that a firm offer just aren’t good value. Consumers won’t come back again if they don’t see value. So it is important to provide a high-quality product that keeps consumers coming back for more. One way to identify this is see how many consumers are repeat buyers. If this is high, then the business can be sure it’s got a good offering.
2. Expand product lines: Sometimes there are niche areas of the market which are not well catered for. By expanding product lines, the business may be able to exploit some of the gaps in the market.
3. Lower prices: Depending on the type of good, and its elasticity of demand, it might be worthwhile to reduce prices it a bid to attract price sensitive consumers.
4. Increase marketing and advertising efforts: marketing and advertising are often overlooked – particularly by smaller firms with tighter budgets. However, its importance should not be underestimated. Even brands like Apple still advertise to maintain brand awareness. So by increasing marketing efforts, brand awareness increases over time, and therefore the consumers trust.
5. Enhance customer service: customer service is an area which is frequently overlooked. When looking at big brands, they tend to start with the customers experience and work back from that. Good customer service has make benefits. It creates loyalty, customer satisfaction and retention, and it builds trust. More importantly, it adds value over competitors that don’t do it well.
6. Acquire competitors: one of the fastest ways to build a bigger presence in the market is to merge or acquire competing firms. This can change the market share of a company over night.
7. Expand distribution channels: by expanding distribution, businesses can service a wider array of consumers. This might be domestically or internationally. For instance, the US state of Texas has approximately 30 million potential customers, but the whole of the US has over 330 million potential customers. That’s over ten-fold!

Whilst some of these strategies can be useful, it depends on a wide array of factors. For instance, it can depend on the type of industry, target market, and overall state of the economy and market. To achieve a well executed plan, these other factors need to be taking into account to increase the share of the market over the long-term.

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About Paul

Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others.

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