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In the dynamic world of business, measuring a company’s success goes beyond just looking at its revenue or profit margins. It’s about understanding its standing and influence in the broader market landscape.
This is where market share becomes relevant, providing investors with a way to assess a company’s ability to compete. However, what exactly is market share, and how to calculate market share of a company? Let’s find out!
What is the market share of a company?
Market share is essentially the slice of the market that a company holds, measured against the entire pie that comprises its industry. It’s a reflection of how much of the market’s total sales a company captures relative to its competitors.
For example, Jio holds a 39.5% market share in the telecom industry, meaning it secures ₹39.5 out of every ₹100 spent on telecommunications services by consumers.
- A high market share often suggests that a company is a leader in its industry.
- On the other hand, a small market share could point to a business with room to grow.
However, before diving into calculation of fair market value of shares of private companies, it’s important to define the market accurately. Comparing companies requires consideration of various factors like
- Industry
- Location
- Product category
- Segment
- The competitors themselves
For instance, it wouldn’t make sense to compare the market share of a luxury bags manufacturer with that of a budget bags manufacturer, even though both belong to the luggage industry. Hence, selecting the right market for comparison is key.
Importance of market share
Market share is a complex metric that affects a company’s financial standing as well as its strategic direction. The main arguments for why market share is an important indicator for businesses are listed below.
- Indicator of market dominance
Market share is a primary indicator of a company’s dominance within its industry. An organisation with a larger market share is frequently considered a leader in its industry, benefiting from advantages like improved brand recognition and competitive positioning.
- Economies of scale
Greater market shares allow businesses to take advantage of economies of scale, which reduce manufacturing costs and increase profitability. By producing goods or services on a larger scale, these companies can spread out their costs over a larger number of goods, effectively reducing the cost per unit.
- Enhanced bargaining power
A higher market share grants a company more bargaining power with suppliers, distributors, and retailers. This can lead to more favourable terms and conditions, further enhancing the company’s profitability and competitive edge.
- Strategic advantages in non-expansible markets
In markets that cannot be expanded, such as utilities or municipal services, increasing market share is crucial for growth. Here, the focus shifts from expanding the market to capturing a larger portion of the existing market.
- Attractiveness to investors
From an investment perspective, market share is a vital metric. It not only indicates the current strength of a company within its market but also its potential for future growth. Investors are more likely to be attracted to companies with a healthy market share, viewing them as stable investments with less risk.
How to find market share of a company?
Market share can be analysed in two ways:
- Value market share, or revenue market share, takes into account the number of goods sold.
- Volume market share or unit market share, which considers the quantity of products sold.
These metrics don’t always align; a company can have a high-value share due to premium pricing but a lower volume share if it sells fewer units.
Here’s how to know the market share of a company.
- Select a defined analysis period, such as a fiscal quarter, year, or several years. Consistency in the period examined is crucial for meaningful comparisons.
- Gather data on the company’s total sales and revenue.
- Obtain industry-wide sales and revenue data for the same period.
For calculating value market share
The formula for calculating value market share is
For example, if ABC Tech has revenue of ₹50 crores in a market where the total revenue is ₹200 crores, its value market share would be calculated as (₹50 crores / ₹200 crores) x 100 = 25%. This means ABC Tech controls 25% of the market’s value.
For calculating volume market share
The formula for calculating unit market share is
Unit market share = (Company’s Total Units Sold / Total Market Units Sold) x 100
Suppose ZZ Motors sold 10,000 cars in a year in a market where 100,000 cars were sold in total. Its volume market share would be (10,000 / 100,000) x 100 = 10%. This indicates that, in terms of the quantity of cars sold, ZZ Motors owns a 10% market share.
Bottomline
Calculating a company’s market share is a foundational step for understanding its position in the market. It not only reveals how a company stacks up against its competitors but also offers insights into potential areas for growth and improvement.
Remember, while market share is a critical indicator of competitive strength and market dominance, it should be interpreted with care and in conjunction with other business metrics for a comprehensive view of a company’s performance.
FAQs
To calculate a company’s market share, you divide the company’s total sales or revenue for a specific period by the entire industry’s total sales or revenue during the same period. Then, multiply the result by 100 to convert it into a percentage. This calculation can be done using either the volume of products sold (unit market share) or the value of those products in terms of revenue (revenue market share).
A “good” market share percentage varies by industry and market context. Generally, a market share that signifies leadership or strong competitiveness within an industry can be considered good. This could range from a dominant 50%+ in less competitive markets to a strategic 20%-30% in highly fragmented industries. Ultimately, a good market share is one that enables a company to achieve its strategic objectives, such as profitability, growth, and influence over market trends, while maintaining resilience against competitive pressures.
To find a company’s market share, you can use publicly available data and apply the formula: Market Share = (Company’s Sales / Total Industry Sales) x 100. The necessary sales figures can often be found in industry reports by research firms, financial disclosures, annual reports from the company and its competitors, trade associations, and government economic data.
Unit market share: This is calculated by dividing the total units a company sells by the total units sold in the industry, then multiplying by 100.
Formula: (Company’s units sold / Total industry units sold) x 100
Revenue market share: This is calculated by dividing the company’s total sales revenue by the total sales revenue of the industry, then multiplying by 100.
Formula: (Company’s sales revenue / Total industry sales revenue) x 100
For example, within the luxury car segment, if Brand X sells 20,000 units in a year in a market where 200,000 luxury cars are sold in total, its unit market share would be calculated as 10%. This means Brand X controls 10% of the luxury car market in terms of units sold. Additionally, if Brand X’s sales revenue from these vehicles is ₹4000 crores in a segment that totals ₹30,000 crores in sales, its revenue market share would be 13.33%.