What is market share?
With optimistic trends and unprecedented availability of resources, India is on the verge of an economic revolution supported by large-scale and innovative companies that are changing the mindset and way of doing business in India. With the advent of many unicorn startups, there is healthy competition among companies to tap the vast potential of the market and win the race to capture higher and better market share.
You may have heard time and time again that companies are valued for their sales. As each company in the market sells specific products or services, these companies are valued against the total volume of sales. For a clearer understanding of market share and how market share is defined, read on.
What is the market share?
Market share is the percentage of sales made by a given company in relation to the total sales of that specific industry. The definition of market share is best understood by taking the company’s total sales and dividing them by the total sales of that particular industry during a given time period. In the market share segment, this metric is used to understand how a business is performing over time relative to its peers. It gives a general idea of a company’s sector profitability and identifies a market leader with the highest percentage of sales.
Calculation of market share
Almost all businesses that plan to grow and expand are monitoring their sales to understand their performance and identify sales gaps. Companies have many professionals to calculate these metrics and use them to compare their performance to their previous quarters. This comparison lets companies know if they are growing or falling behind. However, the problem arises when it is necessary to calculate / know the total sales of the relevant sector. A company looking to know its market share for its business looks to the following factors to know the total sales:
- Total sales data collected by the government in its economic census every four years.
- Government sample surveys to calculate the increase in economic activity.
- Sales data accumulated by a regulatory body or industry association.
Once you know the sales total for a particular industry that a business belongs to, you can follow the steps below to calculate a business’s market share.
Step 1: Determine the relevant period
The first step in defining market share is to determine a specific period of time. Most of the time, companies share their performance and earnings data for each quarter. However, you can identify a company’s market share on a fiscal, semi-annual, annual, or multi-year basis.
Step 2: Calculate the total sales of the business.
A company’s total sales are calculated by adding the value of all the company’s invoices during the relevant time period chosen before making any gross adjustments. Gross adjustments include refunds, returns, customer discounts, etc. Once you’ve added all the invoices, you get the final number of total sales.
Step 3: Calculate market share
Once you have the data for the company’s total sales and the industry’s total sales, you can calculate the company’s market share. For the calculation, divide the company’s total sales by the industry’s total sales. For example, if the company’s total sales are Rs 1,000,000 and the total industry sales are Rs 10,000,000, the company’s market share will be 10%, or 1,000,000 / 10,000 000 * 100.
Importance of market share
The goal of every business is to increase their market share, which she believes is one of the most vital aspects of their success. His belief is true due to the following importance of market share:
- Economies of scale: A company with a higher market share is better positioned in the market to operate on a larger scale and increase its profitability. As they have a better reach and a wide range of customers, the company is well positioned to develop a cost advantage and further increase sales.
- Increase in clientele: An increase in a company’s market share helps to further improve its customer base. As customers tend to buy products from large companies, market share contributes to more visibility and word of mouth, thereby adding new customers.
- Good will: Potential customers associate a company with a higher market share with better quality products. They think it has captured a higher market share just because its products and services are good. This results in an increase in the goodwill of the company and promotes the promotion of the brand.
- Increased bargaining power: A company is better placed to dominate the industry if it has a high market share. The company has the upper hand in setting prices and being a pioneer in letting other companies follow suit in the future.
Types of market share
There are mainly two types of market share:
- Market share in value: This approach calculates market share based on the value of sales. For example, if a company sold Rs 10,000,000 worth of cars, the market share is calculated based on this value. Suppose the total sales value of the sector for a given period is 30,000,000. In this case, the market share of the company will be calculated at 3%, which is Rs 10,00,000 / 30,00,000 * 100.
- Market share in volume: This method drops the total value of sales and calculates market share based on the number of units sold or the number of customers the service is offered to. For example, if a company sells 1,000,000 cars over a period of time and the total number of units sold was 30,000,000, the market share will be 30%, or 1,000,000 / 30,000,000 * 100.
How can companies increase their market share?
Every market-leading company in its industry has already started as a small business. There are many proven ways in which a business can increase its market share:
Innovation: Businesses that innovate can provide new and effective products / services to their customers. If a company offers innovative products, customers tend to choose those products over their competitors. This innovation, over time, can allow companies to increase their market share.
Customer relationship: The customer relationship or the after-sales experience is one of the most important aspects for a company to increase its market share. If two companies have the same quality products, customers will always choose the one that offers the best customer experience. Thus, increase sales and market share.
Skilled labor : A business can increase its market share by hiring skilled employees who can help increase the sales of the business. Companies can also hire former employees of their competitors who are familiar with how the market works and how it works, which provides a better understanding of increasing profitability.
Acquisition: An ideal and effective way to increase market share is by acquiring small businesses / competitors. This can allow a business to exceed the customer base, sales and market share of the acquired business.
Marketing: It is a great way to promote a company’s products / services and build brand awareness. A business can secure increased market share through social media marketing, SEO based content creation, advertisements, podcasts, paid promotions, etc.
Companies may seek to improve their products / services, internal policies and customer experience to increase their market share and ensure high profitability in the future. As customers associate high market share with better quality products / services, it is more than justified that capturing increased market share is the priority of almost every business.
Frequently Asked Questions
Q.1: What is an example of market share?
Answer: Let’s say a company’s total sales by value in the past year was Rs 5,00,000 and the total sales by value of the entire industry was Rs 30,000,000. In this case, the share the company’s market share will be 6%. It is calculated as 5 00,000 / 30 00,000 * 100.
Q.2: How do we calculate the market share?
Reply : There are two ways to calculate market share: in value and in volume.
- By Value: Revenue Market Share = Total Company Sales Value Total Market Sales Value * 100
- By volume: Unit market share = Number of units sold per company ÷ Number of units sold on the whole market * 100
Q.3: What are the impacts of market share?
Reply : A company’s market share can impact the following factors:
- Customer base
- Share price
- Brand and goodwill
- Competitors’ sales