What is Market Share?
Market share is defined as the proportion of total sales of a company during a specific period relative to the total sales pertaining to the industry during the same period. Here, total sales may be measured by volume or value. Volume refers to unit share. Value refers to revenue share.
Unit Market Share = (Total number of units sold by company/Total number of units sold in the industry) x 100
Revenue Market Share = (Value of company’s total sales/Value of total market) x 100
Calculation Process
The simple steps involved in calculating the market share of a company are explained below.
– Determine the period to examine. It might be a Fiscal quarter or a year or multiple years.
– Calculate the company’s total sales over that period.
– Identify and note the total sales of the company’s industry over that period.
– Proportionate the company’s total revenues and industry’s total sales for that specified period.
How to define the Market?
Selecting an appropriate market for comparison is a key element of market share analysis. There are several ways to define a market.
- Industry
- Regional Market
- Product category
- Segment
- Competitors
In the market share, competitors are the key parameters to calculate the market share. For example, a German manufacturer of luxury cars could define their market as the entire global transportation industry but this is probably too broad to generate a meaningful metric. As such, they might compare their sales to their four largest competitors or define their market as the “European market for luxury cars”.
Facts and Factors
– The diversified products that a firm sells compared with the number of products of the same type that other companies sell.
– Increasing market share is not always desirable. If the production of a company is close to its maximum capacity, plans to produce over the capacity is a mere investment in additional capacity. In case, if the extra capacity is not fully utilized, costs will be relatively high.
– Also, promotional activities and advertising expenditure also affect the company’s profits.
– To regain the share, rival companies and competitors start a price war attempt.
– The possibility and probability of analyzing the market share over multiple periods to see how well a company performs against its competitors.
How can market share impact your business?
Market share is a crucial component to several businesses as it has major areas of impact on the company’s growth. To begin with, having a higher market share can allow your company to scale vastly and also increase profits. In addition, more market share directly translates to more sales in the company. The increase in sales is most likely driven by an increased customer base.
Having more market share can also enhance your reputation in the market. This will further increase your customer base and help boost sales. Finally, you can leverage more bargaining power if you have a relatively higher market share. Once a company achieves great market share, bargaining and negotiating with suppliers and distribution channels can be easier.
How to improve your market share?
Here are 3 ways in which you can boost your market share.
1. Innovate
With the right type of product features that come with innovation, you could gain a cutting edge over your competitors, both within and outside the industry. While it is important to keep up with the current industry trend and standards, innovating to solve customer problems is even more important.
2. Increase customer loyalty
One of the easiest ways to reach customers is through social channels. Several companies send out newsletters that contain surveys to receive customer feedback and inputs. However, you could also leverage social media to put up polls, questions, and votes to better understand your customers. In addition, engaging with your customers provides them with an increased sense of trust and would thereby encourage them to stay loyal to your brand.
One main pathway to increasing customer loyalty is by maintaining the standards of your products or by increasing their quality. By increasing the strength of your customer loyalty, you can also preserve your existing market share as your customer will continue to come back to your product or service.
Nowadays, many companies ensure customer loyalty by capturing them inside an ecosystem of inter-dependent technologies on which the customers themselves become dependent over time.
3. Consider an acquisition
Acquiring a company is a space of your potential growth and interest can be very rewarding when it comes to sales as well as market share. For instance, Microsoft acquired LinkedIn as they wanted to expand their reach in the social networking space. This not only helped them gain market share but also their reach to several potential customers. However, keep in mind to choose the right company to acquire.
Share trading tips based on a company’s market share
The impact that market share can have on your company’s stock performance depends on the type of the company. If the company is in a growing industry, market share would not impact stock performance as much. However, for established, mature, or cyclical industries, market share can be a key component to growth. This differentiation is considered the most popular stock trading tip for many investors and traders.
In contrast, when it comes to cyclical industries, market share is a very important and prominent aspect. Market share in these industries is typically determined by components like sales, earnings, and margins among others. There are several economic factors that contribute heavily to these components of market share. So, companies in this industry shell out large sums of money as investments in marketing efforts. Gaining market share is of crucial importance as it would primarily determine the stock performance of these companies.
Industries such as insurance, banks, and other financial institutions can’t have a 100% market share as there exists a risk of 100% in the BFSI sector. Hence, capturing the appropriate amount of market share makes these companies of the BFSI sector profitable – unless the occurrence of a major catastrophe.
Sometimes, a firm collects too much market share and becomes a monopoly in the industry. under such circumstances, it could violate antitrust laws and be ordered to divest assets or take some other action to increase competition.
In the end
Market share is not the end point that demonstrates everything that an investor must know. It just gives an insight into which one firm’s product outperforms or fails to compete against the rest of the field. To use Market share effectively, you should write down your assumptions and make sure you compare “apples with apples.” Always be cautious of market-research reports which often lack explanations of how the market calculation was done. Do a fact check on the Market Share before investing in the firm.
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