Firms are always concerned with the size of the potential market for their products or services and the proportion of that market they actually reachften referred to as a company's market share. Market share is the percentage of the total market (or industry) sales made by one firm. As a formula, Market Share = Firm's Sales ÷ Total Market Sales. Share can be reflected as either percentage of sales dollars, percentage of units sold or percentage of customers. Percentage of sales dollars is the most common reference.
Market share is one of the most commonly quoted measures of success in any industry. To correctly determine market share, one must clearly define the market. Having a small share of a large market can be as profitable as a large share of a small market. A producer of leather horse saddles must determine if his market is made up of saddle sales, equestrian sales, or all leather goods sales. Obviously, his market share in the saddle industry is much larger than his share in the leather goods market.
There are two sources for measuring market share: competitors and consumers. Surveying competitors gives a more accurate and reliable picture of market share. It is possible to interview 100 percent of competitors, but not all consumers. To get a reliable figure from consumers, a large number of people would have to be interviewed. For many industries, sales and market share figures may already be compiled by government agencies, trade associations, or private research firms.
Market share defines the roles played by various firms in an industry. The firm with the largest market share is the market leader. The market leader usually has the highest marketing expenditures, distribution, price changes, and new product innovations. Market challengers are the firms working to increase their market share. Firms in an industry that are content with their share of the market or doing little to increase sales are considered the market followers. The market niche brand is the player that targets its business toward serving smaller, overlooked segments that are often ignored by the larger players. The niche marketer can be very profitable, opting for high margins over higher volume.
The leader must constantly monitor the market because the challenger is constantly trying to take away market share. The market leader has three options to keep its market position: expand the total market, protect market share, or expand market share. Creating more usage, new uses, or users expands markets. Leaders can protect market share by monitoring their position and rushing to remedy any weaknesses. Continuous innovation is the best way to protect market share. When leaders become complacent with their products or services, it becomes easier for the challenger to make progress. In large markets, small increases in market share can translate into very large sales increases; a one-point gain in market share can be worth hundreds of millions of dollars.
The market challenger must attempt to gain market share from the leader. The challenger must have some sustainable competitive advantage to attack the leader's market share. The challenger can attack other competitors through a direct attack by altering price, promotion, or distribution, or indirectly by diversifying or catering to underserved segments. Followers must keep quality high and prices low to maintain their positions. As Armstrong and Kolter point out in Principles of Marketing (1999), the market follower must "find the right balance between following closely enough to win customers from the market leader but at enough of a distance to avoid retaliation."
Niche marketers have many options available to them. The company must find a niche that is safe and profitable. It must be large enough to sustain growth but small enough that it does not look attractive to the market's larger players. Targeting multiple niches is an option that offers the niche marketer a higher chance of survival because the firm is not dependent on one segment.
Across segments, attempts to affect market share take place across the four "P's" of the marketing mix: product, price, place, and promotion. However, there are instances in which increasing market share is not necessarily desirable. The costs to increase production, or improve the product, may not be covered by the incremental profits.
Market share is easily understood by most managers, employees, and shareholders; therefore, it is often used as a primary measure of success. It is critical to understand market share, how it is used to identify market participants, and how the different participants use it to determine their market strategy.
Armstrong, Gary and Philip Kotler. Principles of Marketing. 8th ed. Upper Saddle River, NJ: Prentice Hall, 1999.
Davenport, Todd. "Focusing on Share? Wise Up, Analysts Say." American Banker (1 November 2004): 9.
"Marketing: Market Share." QuickMBA.com. <<a href="http://www.quickmba.com/marketing/market-share/">http://www.quickmba.com/marketing/market-share/>.
Market share refers to the percentage of the overall volume of business in a given market that is controlled by one company in relation to its competitors. For example, if the total sales of a certain product in a market is $100, 000, and the company in question sold $20, 000 worth of that product, then the company had 20 percent market share. Market share is most meaningful in a relative sense; that is, when a company compares the market share it commands to the percentage held by its largest competitors. "The important factor in computing relative market share is not the exact number associated with the sales volume, " Kenneth J. Cook wrote in his book The AMA Complete Guide to Strategic Planning for Small Business. "Your position relative to the competition is more important. You want to know basically if they dominate you, if you are relatively equal in size, or if you dominate them."
To calculate market share, a small business owner first needs to determine the total sales of a product in a target market over a specific time period, usually one year. Then the small business owner needs to calculate the total sales achieved by his or her company in that market over the same time period. It may also be useful to find out the sales level achieved by the company's largest competitors and then use that information to compute relative market share. Information on the overall size of markets is usually available through industry associations, which commonly track both sales and growth rates. If competing firms happen to be publicly owned, their sales figures can usually be gleaned from their annual reports. Otherwise, the small business owner may be need to make an educated guess based on his or her knowledge of each competitor and on information provided by the company's customers and sales staff.
APPLICATIONS OF MARKET SHARE INFORMATION
Many companies use market share as a managerial objective.e., a company might try to gain a specified share of the market by a certain time. Market share can be a useful objective in that it forces small business owners to pay attention to the overall market and to the actions of competitors. It is also easier to measure than some other common objectives, such as maximizing profits. But there are some potential pitfalls associated with setting a company objective of increasing market share. For example, a company may be tempted to set too low a price to achieve this goal, even though a larger sales volume does not always lead to higher profits.
Another application of market share information is in evaluating a company's competitive position in an industry in order to formulate an effective strategy. Information on a firm's relative market sharehich indicates its competitive positionan be combined with information on the growth rate and attractiveness of the industry to determine the best future positioning of the firm. The attractiveness of an industry can be determined through an industry analysis, which points out the threats and opportunities facing competitors. The growth rate of an industry can be determined by measuring trends in customer spending levels. As Michael E. Porter outlined in his classic book Competitive Strategy: Techniques for Analyzing Industries and Competitors, the results of these measurements can be plotted on a quadrant diagram. The horizontal side of the matrix represents the firm's competitive position and the vertical side represents the growth rate and attractiveness of the industry, both ranging from weak to strong.
If both the company's competitive position and the industry's attractiveness and growth rate are strong, then the company occupies a fortunate position and is known as a "star." The most appropriate strategy for star companies is to exploit their competitive advantage and protect themselves against new competitors entering the industry. If both the company's competitive position and the industry's attractiveness and growth rate are weak, then the company is in an unfortunate position and is known as a "dog." The potential for market growth is limited, and the company's future prospects in the industry do not appear promising. The most appropriate strategy for a dog company is to limit spending, generate as much cash as possible in the short term, and consider exiting the industry.
If a company holds a strong position in a weak industry, it is known as a "cash cow." The best strategy for companies in this situation is to milk the market for cash while not expending too many resources. Finally, if a company occupies a weak competitive position in a strong industry, it is known as a "question mark." The business owners have important strategic decisions to make. Although there is strong future potential in the industry, the company's weak position means that it will have to make a significant investment to take advantage of the opportunity presented. In this case, it is particularly important for the business owner to understand his or her customers and competitors to determine whether it will be possible for the company to develop a competitive advantage.
Cook, Kenneth J. The AMA Complete Guide to Strategic Planning for Small Business. Chicago:American Marketing Association, 1995.
Green, Gloria, and Jeffrey Williams. Marketing: Mastering Your Small Business. Chicago:Upstart Publishing, 1996.
Porter, Michael E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York:Free Press, 1980.
Urban, Glen L., and Steven H. Star. Advanced Marketing Strategy. Englewood Cliffs, NJ:Prentice Hall, 1991.