Market Share Definition
Market share refers to the company’s percentage of the entire sales of the market or industry in which it operates. In other words, it refers to the company’s sales amount compared to that of the overall industry. Generally, market share is a metric that indicates the size of the company in an industry or market.
A Little More on What is Market Share
When the market share is huge, it means that the company is experiencing higher sales through the expansion of its consumer base, compared to its competitors. Market share can be categorized by product, industry or specific product.
Nonetheless, this is not always what happens. This is because some firms who control a huge percentage do so as a result of the barriers that exist in the overall market or industry. This situation most of the time leads to what may be termed as, “a monopolistic structure.”
How Market Share Works
Note that the calculation of market share applies only to specific countries. Countries that calculate market share include Canada or the United States only market share. Data for calculating market share is usually drawn from some independent sources as listed below:
- Trade groups
- Regulatory bodies
- From Companies themselves
However, it is worth noting that accurate measuring of market share in industries vary. This is because while investors find it easy to accurately measure market share in some industries, some do prove to be difficult for investors.
How to Calculate Market share
To be able to calculate a firm’s market share, you first begin with determining the period you wish to assess. The period, in the case, may range from a year, fiscal quarter or even several years. After you have determined your period length, the second thing will be to calculate the total sales of the company over the identified period. The next step will be to determine the company industry’s total sales.
Let’s assume that Company ABC sold $20 million toys in the last fiscal year. The number of toys sold in the United States amounted to $40 million. In this case, the toy’s market share of Company ABC in the United States’ would be 50 percent.
Why is Market share Important?
Despite the market share not being able to provide a company with a definite figure as far as its profits are concerned, it does give important ideas regarding the company’s growth, net profits as well as revenues.
Note that when an enterprise is large, it means that it has the ability to serve a larger number of customers with efficiency as far as cost is concerned. In other words, large market share enables an enterprise to sell at a significant discount following the large orders they get from customers. This translates to high net profit margins, since the discounted sales enable the business to capture its competitors’ customers, attract new customers, and at the same time maintain their current customers.
How Enterprises Increase it their Market Share
When there is an increase in market shares, it allows businesses to scale high in its operations and profits. Enterprises increase their market share through the following means:
- Advertising their products or services
- Introducing a new product in the market
- Lowering the price of either their product or service
- Expanding their businesses to other demographics
- Ensuring customer loyalty by strengthening the relationship between them
- Ensuring customer satisfaction
- Acquiring a competitor. This ensures that you gain control of its new customer base as well as narrowing the number of competitors who are also eyeing the same share to only one.
Note that when you have a large market share in an industry, it works against your competitors in that you are likely to dominate the overall market (you will exercise industry monopoly). In other words, it will enable you to sell your products with very little or no competition at all.
However, there are antitrust laws enacted by government bodies to ensure that businesses do not expand their market share too much to the extent of eliminating competition. It is important to note that when there is no competition in a given market, prices of commodities or services will always be costly. This is because prices in that market are determined by one entity, which will always be higher because there are no competitors to offer challenge.
Notably, there are some industries who prefer not to have 100% market shares because of the risk associated with holding a large market share. Financial institutions such as banks and insurance companies are a good example. They prefer having just a percentage of market share that will enable them to comfortably carry on with their operations and at the same time make profits.
Such institutions believe in the notion that “the bigger the market share, the higher the risk.” For this reason, they would rather have a market share that is average so that in case of any catastrophe, they would not incur huge losses are a result of holding a large market share.
Impact of Market Share
Companies in an industry with low growth are largely affected in terms of performance whenever there are changes in market share. This contrary to those companies in an industry with steady and rapid growth. The market share impact in this industry is generally less.
Note that market share competition in cyclical industries is usually ruthless. In this type of industries, economic factors such as sale’s variance, earnings, and margins play a bigger role as far as market share is concerned. Due to competition, the margins are usually below with maximum efficient operations.
Also, in cyclical industries, companies are usually ready to temporarily lose money so that they can force their competitors out of the market. Once they eliminate their competitors from the market and able to control the greatest market share, they then increase the price of products or services in that particular industry. It is, however, important to note that this kind of strategy can work for you and at the same time work against you leading to huge loses.
Why Increasing Market Share is not Desirable
Note that despite market share is beneficial to businesses, it, however, comes with its own disadvantages. These disadvantages make businesses to find it unsuitable to increase their market share in the industry in which they operate. Some of the disadvantages include the following:
- You are likely to get yourself in trouble with antitrust law when you increase your market share while you already dominate the industry.
- Secondly, you are likely to face rivalry from your competitors when they decide to get back their market share by initiating a war-related to price.
- Also, there is a likelihood of firms reducing their profits the moment they decide to increase their market share. The loss comes as a result of firms spending significant amounts of money on promotions or when they reduce prices of their products or services in the market.
- When a firm close to production capacity tries to make more production, it translates to extra capacity. There is then a likelihood of cost or production increasing if the extra capacity is not utilized to the maximum. High costs will definitely bring down the profit margins.
References for “Market Share”