What is Market Share?

Understanding Market Share

Now that one understands what Market share is let us discuss how to calculate it in a more in-depth approach.

The first step in calculating a company’s market share is to decide on a given period you want to survey, whether that be any of the quarters in a fiscal year, the entire year itself, or any period which one prefers. Next is to calculate the sum of the company’s sales over your selected period, and find out the sum of the industry’s sales that the company is based in. Lastly, one must divide the sum of the company’s sales by the industry’s sales to get the market share for said company.

For example, let’s say a “candy” company sold $50 million of their supply in the last 3 months, and the sum of candy sold across the industry was $100 million, the company’s market share for the “candy” industry would total out to 50% for that fiscal period. This calculation for market share is carried out for particular countries and their markets. For example, an automobile company will often report their market share for a specific country to get an idea of how they are faring in those specific markets given that they sell their product in a multitude of places all with different competition.

Market share data can be sourced from a multitude of places, whether that be from trade groups, stats/business information websites, or from the company itself. Although, note that some industries are more problematic when it comes to measuring their market share compared to others.

Benefits of Market Share

Investors and analysts carefully monitor the increases and decreases in a company’s market share because it is known to represent the competitiveness of a company’s yields. In addition, as the demand increases for a product from a given company so do their revenues at the same rate as the market as a whole, however, this is only true if said company is upholding its existing market share.

Essentially, a company that actively grows its market share also grows its revenue faster than the likes of their competitors. Investors should also note that when market share increases it allows a given company to reach a larger scale in terms of its operations, this subsequently increases profitability.

Companies increase their market share in a multitude of ways but what is commonly seen is the act of lowering prices, advertising or bringing about new products or variations of previous ones. Furthermore, another common way companies increase their market share is by engaging new demographics of people via their products or ad campaigns.

It is important to know that massive gains or losses in a company’s market share will have a significant impression on said company’s stock price, all of which is contingent on the current state of the industry the company is in.

Market Share Impact

A change in market share can have significant impacts on the performance of a given company in a recurrent industry where there is little to no development. On the contrary, these same changes in market share have little to no impact on companies in a growing industry (growth industry).

Fundamentally, in these industries, the amount new markets and opportunities that are being created is increasing. Meaning that even if a company is down in terms of market share it can still simultaneously be growing their overall sales. The stock of companies that land in this category is more often affected by an increase in sales rather than other leading factors.

One should know that in cyclical industries market share is a lot harder to come by than normal, i.e. there is a lot of competition as certain economic factors like sales, margins, and earnings tend to have a larger impact in comparison to other factors. In summary, what is often seen is low margins whereas operations are at a max efficiency to keep up with the growing competition.

Moreover, sales often come at the expenditure of other companies as to attract sales a company must invest profoundly in marketing campaigns or resort to employing a loss leaders strategy. Note that in these industries companies will be prepared to lose money on sales to pressure other companies into bankruptcy. This is done all to receive a gain in market share and once said company does see that gain via another company’s downfall they will proceed to prices back to their subsequent normal. This strategy works quite well but can go wrong, resulting in the compounding of their losses. Although, this is also why industries are often dominated by a small number of large companies.

How Can Companies Increase Market Share

There are a multitude of ways a company can increase their market share whether that be through introducing new and more innovative technology, reinforcing customer relationships, hiring employees who are a cut above the rest, and surprisingly, acquiring new competitors.

New Technology:

Improvement of current technology is a common method that companies can use to increase market share. When a company introduces innovative technology that its competitors have yet to replicate or provide, customers will gravitate towards it and want to buy it from the said company even if they dealt with the competitor(s) previously. For example, someone who wants RTX ray tracing from a NVIDIA Graphics Card will buy from NVIDIA as AMD does not offer RTX, and they will buy from NVIDIA to receive said technology even if they have favored AMD previously. Many of these subsequent consumers will become returning customers which end up increasing market share for a given company and decreasing market share for their competitors which the customer(s) left.

Customer Loyalty:

A good way for companies to protect their market share is by increasing customer loyalty. This will result in customers staying loyal even when a hot new deal is released by the competition. However, increasing customer loyalty yields more than just sustainable market share for companies as it also is a way of increasing market share. This is due to the fact loyal customers will often speak highly about said company with friends and family who will often end up as customers as a result of the “recommendation”.

Talented Employees:

Although, there is no direct correlation between an increase in market share and talented employees companies with higher market share always have employees that are highly skilled in their work and disciplined to a tee. This is why bringing in better employees has a positive effect on the company as it can lead to increased market share via other factors but also allows companies to spend less on training and turnover, and allows them to devote more time and money elsewhere.

One should note that offering a more competitive salary to potential employees is a foolproof way to attract the finest and hardest of workers, however, many nowadays looking for jobs often seek benefits that employers are not obligated to provide due to the nature of how jobs work. These things may include flexible work hours or a more casual work environment.

Acquisitions:

Another method to increase market share is by acquiring competition in a given industry. By doing this a company does one of two things, it reduces the number of companies competing for market share by one, but it also gets its hands on the acquired company’s customers. This is why executives of companies both large and small are always on the lookout for acquisition deals that will benefit their company during a growth period.

Real-World Example of Market Share

Every corporation that is stationed in a multitude of nations often measures its success based on the market share of specified markets. For example, China has been an important market worldwide as it is the fastest-growing market for almost all products such as electronics, clothing, etc. Note that even companies like Apple use its market share numbers in China as a key performance indicator regarding the growth of their business.

Apple’s market share for Chinese smartphones from 2018 to 2019 fell by nearly 15%. This was mostly due to increasing trade tensions and tariffs between America and China. Furthermore, in 2020 Apple’s sales were down resulting in another 8% loss in market share due to the decreased sale of iPhones in China.

What is Market Share Continued?

Market share is a common indicator used to measure a company’s size, however, it is also a useful metric used to measure how much a company dominates a given industry.

Market share is calculated as the percentage of a company’s sales in their industry over a given period and one should note that a company’s market share influences their operations.  Mainly what is affected is the state and stability of the company’s share price but prices of products and operations often fluctuate with high and low market share.

Why Is Market Share Important

Market share is the key indicator of a company’s competition. Basically, when a given company increases its market share this, in turn, increases a company’s productivity and profitability.

It can be seen like this, as companies increase in size, they can then begin to expand their influence on the market, in turn, offering lower prices and slowing competitor growth. Although, in rare cases companies will intentionally take losses in certain departments to cause financial damage to the competition, forcing them into losses and subsequently, bankruptcy. Consequently, the company will increase its market share and later an increase in prices will follow as a result of lower competition and more demand.

It is important to note that market share greatly affects share price, particularly in cyclical markets when competition is high, margins are small, and any difference in market share may spark weakness or strength in investor sentiment.

What Strategies Are Used To Gain Market Share

To gain market share a company can apply a multitude of the following strategies. Firstly, introducing innovative technology is known to attract new and existing customers resulting in increased market share as they will buy the more innovative technology from you as a company, rather than older tech from competitors. Secondly, increasing customer loyalty is a foolproof method for increasing market share. This process often results in the expansion of the customer base and the strengthening of current customer loyalty through various methods like ad campaigns, discounts, and benefits. Subsequently, these actions often result in increased market share. Thirdly, hiring new and experienced employees allow companies to avoid high turnover and training costs and focus more on core operations and expenses. Lastly, acquisitions of other companies in the same industry allow them to reduce competition and acquire more customers, in turn, increasing market share.