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About Wall Street Prep
What is Market Share?
Market Share represents the percentage of total revenue that a company generates within a given industry.
Simply put, the market share of a company quantifies its contribution towards the total sales attributable to a specific industry over a specified period.
- What is the definition of market share?
- Which formula calculates the market share?
- How is profitability connected to market share?
- What are some methods to gain or protect market share?
Table of Contents
The market share of a company illustrates its size relative to the rest of the industry it operates in and its competitive positioning.
The process of estimating a company’s market share can be useful for estimating the revenue opportunity within a specific market.
- Low %: If a company’s market share is low, there is likely far more upside in potential growth and scalability.
- High %: On the other hand, a company with a high market share – i.e. a market leader – could have to shift its priority to defending its existing share and profit margins from new entrants.
Moreover, if established companies with high market shares seek additional growth, the best course of action could be implementing one or more of the following strategies:
- Entering New or Adjacent Markets
- Introducing Products/Services into Mix
- Growth through Acquisition
Market leadership and sustainable long-term profits go hand in hand, as both come from the same underlying drivers.
Growing market share is directly tied to achieving scalability, which in turn improves profitability, i.e. economies of scale and network effects.
There is a clear connection between market share and profitability, as market leaders tend to be more profitable than those with low market shares.
Companies attempting to obtain more market share are, more often than not, spending cash at a rapid pace – whereas mature companies possess more established business models and operate with greater efficiency.
Companies with high market shares that have been able to maintain their positioning consistently are typically perceived to have an “economic moat.”
The formula for calculating the market share of a company divides a company’s sales by the total sales of all companies operating within the respective industry over a specified period.
Market Share Formula
- Market Share = Company Sales ÷ Total Market Sales
Another related metric is the “relative market share,” which is calculated by dividing a company’s market share by the market share belonging to its top competitor.
The relative market share can gauge how a company fares against the current market leader, i.e. the market leader’s market share is used as the benchmark.
The formula for the relative market share takes the market share of the company in question and divides it by the market share of its top competitor.
Relative Market Share Formula
- Relative Market Share = Market Share of Company ÷ Market Share of Top Competitor
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Suppose a company generated $10 million in sales during its latest fiscal year.
If the total sales from all companies in the industry amounted to $200 million across the same period, the company’s current market share is 5%.
- Market Share = $10 million / $200 million = 5%
And if our company’s top competitor brought in $40 million in sales over the same period, the relative market share is equal to 25%.
- Top Competitor Market Share = $40 million / $200 million = 20%
- Relative Market Share = 5% / 20% = 25%
The current market share of a company and the market size are important pieces of top-down forecasting, which is an approach used to project sales using a company’s total addressable market (TAM) and a market share assumption.
If a company’s market share has been growing in recent years, its recent and projected growth rate in all likelihood is outpacing that of its industry peers.
Conversely, if a company’s goal is to maintain its existing market share, it must continue growing at the same rate as the total market.
Generally, gaining more market share stems from delivering the most value and leading user experience available in the market.
The notion that offering the most innovative products and services mix can increase market share certainly has its merits.
But there are exceptions such as marketing-oriented industries where competition is based around reputation.
Still, creating value propositions that satisfy unmet customer needs is a reliable route toward obtaining market leadership.
Companies with differentiated, innovative offerings can grab market shares easier, as customers migrate from their competitors that might lack technical capabilities.
Customer retention is arguably more important than new customer acquisitions when it comes to protecting market leadership, especially over the long run.
Therefore, companies must strive to reduce customer churn, which is a function of understanding their customers’ specific needs – i.e. insights enabling companies to serve those customers better.
After building trust and loyalty with their customer base, companies can benefit from more reliable sales, as well as more organic growth and “word of mouth” marketing.
Companies must also continuously reinvest (e.g. capital expenditures, research & development) and be prepared to adjust to unexpected developments in the market.
Alternatively, another defensive tactic is to acquire high-growth companies, which nowadays are usually technology-oriented.
If market leaders become complacent and stop improving, it is only a matter of time before a different company disrupts the market to capitalize on the opportunity.
The downfall of Blockbuster (and the success of Netflix) is one frequently used case study of an incumbent refusing to accept changing consumer trends until it was too late.
