What is Market share? And why is it so relevant?
Created on 08 May 2021
Wraps up in 6 Min
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Updated on 02 Sep 2022
"Market share is king. You cannot afford to replace lost market share" - Frank Perdue.
At the outset, what is this market share everyone talks about? Well, market share can be referred to as the share of a company's sale in relation to the total sales of the market that it operates in. Now, the market generally refers to the customer base that a business targets, like the global transportation market, the entire FMCG market, etc.
But for calculating and comparing the market share of a business, the interpretation of "market" tends to change. It could be an industry having similar players; a regional market, a product segment, a product category or a group of competitors.
Market Share - in layman's terms
To understand the concept of market share even better, let's take an example. Let's assume you're the only customer on this planet. And say, you plan to travel by train. You can book your tickets and travel only by Indian Railways. This implies that Indian Railways has 100% market share in the Railway industry of the country. In contrast, let's say you buy 10 chocolates. If you buy 6 chocolates of brand A and 4 nos. of B choco bars, that means A holds 60% and B holds 40% of the total market share in the chocolate industry, respectively.
This bifurcation gives a clear picture as to the position of the business in the market, its contribution towards the growth of the said market. It helps businesses build better strategies for their growth. Also, for stock trading, it helps potential investors assess the company and decide if it is worth investing into.
How to calculate market share?
The market share of a company is usually calculated for a specific period of time. It can be calculated either based on the volume or the value.
Volume: For volume-based market share, the numbers of units are considered. Calculate the total number of units of the product sold in that industry. Then determine the number of products sold by a particular company. Then, apply the following formula:
(No. of units sold by a company/Total no. of units sold in the industry)*100
Value: For value-based market share, the total sales revenue is considered. Calculate the total value of the products sold in that industry by all the firms by multiplying the total number of products with the average selling price. Calculate the sales revenue generated by a particular firm. Thereafter, apply the following formula:
(Value of products sold by a firm/Total value of products sold in the industry)*100
Which one of the 2 methods to choose depends on the industry that the business is functioning in. There are certain products whose value is higher when compared to the volume sold. For such products, value market share is preferred. For other products like FMCG, which are sold in huge quantities but are not very high in value, volume market share is calculated.
Importance of market share
When an industry has huge competition, market share is one such factor that helps determine which company has outperformed the other. Market share helps one understand which brand a consumer prefers.
It is important for a firm to implement strategies that help increase the market share, as it would lead to increased sales with comparatively lower efforts. Once the brand visibility improves, growth in sales follows. It also restricts the entry of other firms into that industry.
Pros of larger market share
- Economies of scale
If you aren't aware of what economies of scale are, here's an explainer. It basically refers to the per-unit cost advantage a firm enjoys on its products when it expands its operations. It could be in terms of cost of inputs, marketing costs, or other cost components.
A larger market share implies that the business is operating on a large scale. So a company having a higher market share does enjoy economies of scale.
- Increased customer base
An increase in the market share of a firm leads to a wider reach. It helps target and attract more customers and increase the customer base.
Capturing a large market share is not easy. If a firm manages to do it, it implies that its operations are efficient; human resources employed are proficient, and also the quality of the products are standardised. This helps the firm earn a good reputation in the market.
For instance, when the question is about baby foods, the answer is, hands down, Cerelac.
- Industry domination
When a firm manages to capture a large chunk of the market share, it enjoys the benefits of a monopoly. The firm becomes the price leader and trendsetter, meaning it has the power to set strategies to its advantage, and other players in that industry would follow the price set by the monopolist and also set similar strategies. If they do not, they will lose their position in the market.
How to increase the market share?
Now that we have established that firms having a large market share enjoy certain benefits let's understand how a firm can increase its share in the market.
One of the most effective ways to increase the market share of a company is by acquiring its competitors. This is not feasible to all the companies out there. The company needs to be well established and must have the resources to procure and handle another similar business.
With so many players in an industry, innovation is one element that helps a business grow constantly. The ability of a firm to think out of the box, bring innovative changes in its products, adapt to the dynamic environment and adopt advanced technologies gives it an upper hand over its competitors. This, in turn, helps the company grow and acquire a larger market share.
And what could be a better example of extraordinary innovation than Google?
- Human resource
The manpower of a company is a crucial resource that cannot be replicated. The competitors could replicate every possible strategy but can't bring the same manpower as yours. It's very important to assess the skills and qualifications of an employee before recruiting them. A smart and efficient group of employees will help the company grow, thereby increasing their market share.
- Strengthening customer relationship
As is rightly said, the customer is the king. A business is operational only and only because customers are willing to purchase its products. Being open to customer feedback, providing standardised products that satisfy their needs, and strengthening their relationship with customers helps a business increase its customer base and also acquire a large market share.
A company spends huge sums of money, time and energy on its advertisement. With so many platforms available for advertising a product, it becomes necessary to create unique advertisements to catch the attention of potential consumers. Unique and frequent advertising is also a good way to increase a company's market share.
Capturing a large market share might seem as the only goal a company must have, but it isn't true. A company having a large market share does enjoy a lot of benefits, but it also has its drawbacks.
It is quite difficult to maintain this position as it involves a heavy investment of time and efforts. Also, any kind of changes in the business environment could adversely affect the business.
Therefore, most companies, rather than setting unrealistic goals, choose to determine a certain level of market share which is most feasible, considering the size of the business, the long term goals and other factors and chalk out the most appropriate strategy to reach there.
Anyway, which other company do you think could disrupt the respective industry with its increasing market share in the future? Let us know your thoughts in the comments below.
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