Market Share

What is Market Share?

Market share refers to the portion or percentage of a market earned by a company or an organization. In other words, a company’s market share is its total sales in relation to the overall industry sales of the industry in which it operates.

Say, for example, the purchasing activity of consumers as a whole is 100 tubes of toothpaste, and a certain toothpaste maker sells 60 tubes. It implies that the company holds a 60% market share. The calculation of market share takes into consideration a company’s total sales over a particular time period and the total sales of the industry in which it operates over that period.

Formula for Market Share

The market share is calculated as follows:

Impact of Market Share

1. Economies of scale

An increase in a company’s market share can allow the company to operate on a greater scale and increase profitability. It also helps the company develop a cost advantage compared to its competitors.

2. Increased sales

An increase in market share also helps boost a company’s total sales. When consumers notice the brand loyalty of a majority of their peers, the remaining consumers are also driven to purchase that product.

3. Increased customer base

An increase in market share also helps a company widen its customer base. When a majority of the consumer base is loyal towards one brand or product, the rest may also follow.

4. Reputation

An increase in market share helps enhance the reputation of a company. A good reputation, in turn, helps boost sales and broaden the customer base.

5. Dominating the industry

With an increase in market share, a company increases its dominance over the industry it operates in.

6. Increased bargaining power

With an increase in market share, a company starts to dominate an industry. With increased dominance over the industry, a company can exercise certain powers such as greater bargaining power. The company starts to enjoy an upper hand and can negotiate to its advantage with suppliers and distribution channel members.

How to Increase Market Share?

1. Innovation

Innovation is an excellent method of increasing market share. Innovation can be in the form of product innovation, production method innovation, or simply introducing new technology to the market that competitors are yet to offer. With innovation, a company can gain an edge over its competitors and dominate the industry.

2. Lowering prices

A company can also expand its market share by lowering its prices. Lowering prices will attract more customers and help widen the customer base and increase sales, hence increasing the market share of the company.

3. Strengthening customer relationships

By strengthening their existing customer relationships, companies protect their existing market and ensure no loss of the existing customer base owing to high competition. This also increases customer satisfaction, which in turn helps increase customer base through word-of-mouth.

4. Advertising

Advertising is an expensive yet effective way to increase market share. With heavy, cutthroat competition in the market, advertising is an excellent way of gaining an upper hand over competitors.

5. Increased quality

Customers are getting increasingly conscious about the quality of a product in addition to its price. By ensuring higher quality standards, a company can increase its market share.

6. Acquisition

Acquiring a competitor is a sure method of establishing dominance over an industry. By acquiring a competitor, a company not only gains access to a new customer base, but it also reduces competition and helps establish dominance over an industry and increase market share.

Illustrative Examples

• Apple Inc.: Apple is an excellent real-life example of a business that commands a large absolute market share and dominates the industry within which it operates. In the smartphone industry, it is one of the market leaders, fighting very strong competitors such as Samsung and Huawei. In the majority of the markets in which Apple operates, the US-based company enjoys, on average, a market share of 70%.
• Colgate: Colgate is another excellent example of a company that commands a large absolute market share. In the toothpaste industry, Colgate accounts for over 80% of all toothpaste sales.

Related Readings

Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Average Revenue Per User (ARPU)
• Competitive Forces Model
• Total Addressable Market (TAM)
• Viral Coefficient
• See all economics resources