How well is your business doing?
Market share is one of the key metrics you’ll need to answer that question. Market share helps contribute to how well your value proposition is being received by your customers, how well your products and services are resonating, and how effectively you’re managing to fend off competitors. But how should you calculate market share? And, perhaps more importantly, what can you do to increase your share of the market?
We’ll be addressing these key questions and more in this comprehensive guide. Read on to learn more about what market is, how it differs from market penetration, why you should concentrate on increasing it, and crucially: how. And, if you need extra help, we even have a solution that can help you estimate the size of your market across your region, country, or even globally.
Let’s clarify what we mean by market share with a short definition:
Market share is the percent of total sales in a specific industry generated by a particular company.
The reference to a specified industry is crucial when it comes to how to calculate and understand market share. That’s because it helps you to compare your performance against your competitors, however you define them. For instance, if you sell organic pet foods, you might consider your competitors to be pet food sellers overall or narrow your market focus only to those that sell organic pet foods. There are good reasons for calculating both: if you think you could persuade customers to switch from buying regular to organic pet food, you should consider your relative market share of both markets. However, you wouldn’t calculate your market share of the pet industry generally, because the customers of sellers of other pet goods (like toys and medicine) wouldn’t consider your products as substitutes. For this reason, it's crucial to segment your market appropriately before estimating market share. Learn more on market segmentation.
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In short, market share is the share of the market that you are directly competing in. When calculated, it can give you a general idea of the size of your company in relation to its market and its competitors.
If you regularly capture and compare market share information, you can pinpoint your position relative to your rivals in the market. Specifically, market share information can help you understand if you are:
You may have seen the terms market share and market penetration used interchangeably. They’re certainly related concepts, but there is a key difference that you’ll need to understand. Market penetration describes the percentage of your target market that you sell to in a period of time. In contrast, market share is the portion of the total value of a market that is captured by your products, services, or brand. So:
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Let’s take a deeper dive into why it's important to understand market share.
It helps you to measure your competitiveness.
Increases and decreases in market share can be a sign of the relative competitiveness of your products or services relative to those of your rivals. That’s why we recommend gathering market share data not just as a one-off task, but as a regular activity that’s a core and crucial part of your competitive strategy. Market share data can help you identify if competitors are making strategic moves that are driving their sales and alert you if you need to take competitive action.
It helps you learn more about the nature of the industry you’re competing in.
Some industries, like the grocery market or software are made up of small numbers of very large companies that together capture large amounts of market share. For instance, did you know that nearly 99% of S&P 500 firms are audited by one of the “Big Four” management consulting firms: Deloitte, KPMG International, PricewaterhouseCoopers and Ernst & Young?
In a market like this, a market share of less than 0.5% can actually represent quite strong performance. Other industries are comprised of very large numbers of firms with smaller shares, and growing market share may be easier in this type of industry. So, knowing whether the market is fragmented or consolidated is key when determining whether your market share is strong or weak
It gives you insight into your market performance.
Changes in market share have a larger impact on the performance of companies in mature or in cyclical industries where there is low growth across the board. If you operate in an industry like this, knowing your market share (as well as those of competitors) can help you determine performance. For this reason, we recommend capturing market share data as one of your key performance indicators (KPIs).
Market share is a need-to-know metric. But, how do you calculate it? The good news is that calculating market share is relatively easy. It is estimated by taking the company’s sales over the period and dividing by the total sales of the industry over the same period. Let’s break it down into 3 easy to follow steps:
To calculate market share, you should first identify the time period you want to examine. There are no hard and fast rules on this—it can be a fiscal quarter, a 12-month period, or even a period covering multiple years. For many businesses, it makes sense to examine market share over the past 12 months. However, if you’re in an industry that changes quickly, examining a shorter time period could yield critical insight. And, if you’re in a relatively stable market, a longer time period might be better at capturing more nuanced market shifts.
Step 2: Calculate total sales
Next, calculate your company’s total sales over that period. Remember that it's important to compare like with like when calculating market share. If your company sells a varied range of products that compete in several different markets, restrict your sales calculation only to the goods pertinent to the industry. For instance, if you sell children’s clothing and children’s toys, and you want to find out your share of the toy market, you should exclude revenues from the sale of children’s clothing from your calculations.
Then, find the total sales of your industry. This data can often be found online on industry aggregator websites and in published market research reports. Make sure you compare your sales with the appropriate time period, or as close to it as you can find. Depending on the availability of data, you might also be able to narrow your focus to a specific geographic area.
Step 3: Divide company revenue by industry total sales
Finally, divide your company’s total revenues by its industry’s total sales to find the market share percentage. This will yield a single figure, but remember that in order to best interpret that figure, you’ll need some benchmarks or comparisons, such as the industry average, or previous years’ figures.
What if you’ve estimated market share and found it to be lower than expected or targeted? In that case, it's time to embark on some tried-and-tested strategies for increasing market share. Let’s take a look at a few.
Capitalizing on new technologies and innovation is one method that may increase market share. When a company brings a new technology to market that its competitors have yet to offer, consumers wishing to own the technology will switch to buy it from that company, even if they previously did business with a competitor. Many of these consumers become loyal customers, which adds to the company’s market share and decreases market share for the firm that they switched from.
So, incorporating new technology into products, services and processes can be a valuable way to increase your share of the market. There are a couple of caveats to note, however. First, there are costs associated with investing in new technology. The expected increase in market share, revenues and profits should be worth your time and investment. Second, the resulting market share increase may only be short-term, as competitors recognize the shift, and react accordingly. You can keep tabs on how the industry is reacting to your moves with the help of our industry tracker.
In today’s fast-moving markets, customers have more choices than ever before. There’s always the chance that your customers will switch to a competitors’ offerings. And, since loyal customers tend to spend more, fostering a loyal customer base is key to building your market share. By strengthening customer relationships, you can protect your existing market share by preventing current customers from abandoning when a competitor rolls out a new offer.
Satisfied customers frequently speak of their positive experience to friends and relatives who then, in turn, become customers. So, to build market share in a consistent and stable way, find out what your customers want—maybe using market research surveys—and work to satisfy their needs.
While market share is all about sales, your focus should not only be on your customers and the external market. Companies with the highest market share in their industries tend to have the most skilled and dedicated employees. That’s because bringing the best employees on board reduces expenses related to turnover and training, which in turn enables companies to devote more resources to focus on core competencies. A key step in the talent management process is to find out how engaged your employees are. Get an out-of-the-box survey template for measuring employee engagement.
Mergers and acquisitions
Market share measures how sales in an industry are distributed among its incumbents. So, it makes sense that one of the surest ways to increase market share is by acquiring a competitor. By buying up its competitors, a company is able to tap into the newly acquired firm’s existing customer base and reduce the number of firms fighting for a slice of the pie. Before you think about buying a rival company, however, make sure you do your due diligence. Buying a company with poor brand equity or with low levels of customer satisfaction is unlikely to generate much in the way of additional market share in the long term.
Given how competitive markets currently are, customers are increasingly conscious about the quality of a product in addition to its price. For many products and services, customers are willing to pay more for high quality goods that last and deliver on their brand promises. That means that even if you offer your products at a higher price, you can still entice customers from your competitors by highlighting quality in your marketing campaigns and setting higher quality standards. A segmentation survey will help you understand if your customers are bargain hunters or have a preference for higher quality products and services.
On the other hand, offering lower prices can also build market share. This is the low-hanging fruit of expanding market share because certain consumers look for lower cost products. Before making the decision to lower your prices, however, you’ll need to estimate the impact on demand and sales. We have a guide to help you with that, right over here.
Ready to get started on calculating and increasing your market share? Let Momentive help with your initial market sizing efforts. If you want to survey your market to find out who they’re buying from and how much they’re spending, SurveyMonkey Audience can put you in touch with the right respondents for your surveys.