The meaning and calculation of market share

Market share measures a firm's relative size within its industry. It shows the proportion of total industry sales that a particular business captures, usually based on sales revenue. This allows businesses to assess their position compared to competitors and track changes over time.

Formula for calculating market share

$\text{Market share (\%)}=\frac{\text{sales revenue of the business}}{\text{total sales revenue of the market}}\times 100$

Where:

• Sales revenue of the business = Total value of sales for the specific firm (£)
• Total sales revenue of the market = Combined sales value of all firms in the industry (£)

Market share can also be calculated using sales volume (number of units sold) instead of revenue, depending on the data available.

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Worked example - Calculating market share

A clothing retailer has sales revenue of £250,000 in a market where total sales revenue is £1,000,000. Calculate the retailer's market share as a percentage.

Step 1: Identify the values

• Sales revenue of the business = £250,000
• Total sales revenue of the market = £1,000,000

Step 2: Apply the market share formula

$\text{Market share (\%)}=\frac{\pounds \mathrm{250,000}}{\pounds \mathrm{1,000,000}}\times 100$

Step 3: Calculate the market share

$\text{Market share (\%)}=\frac{\pounds \mathrm{250,000}}{\pounds \mathrm{1,000,000}}\times 100=25\%$

The importance of market share

Market share is a key indicator of a business's performance and competitive position. It helps managers understand their firm's standing in the industry and make informed decisions to improve or maintain it.

Reasons market share matters

• Performance benchmark - Allows businesses to compare their sales revenue or volume against competitors, highlighting strengths or areas for improvement.
• Strategic objective - Many firms aim to increase their market share as a core marketing goal, which can lead to greater influence in the industry.
• Indicator of growth - Rising market share often signals successful strategies, such as effective marketing or product innovation.
• Resource allocation - Helps firms decide where to invest, such as in advertising or expansion, to protect or expand their position.

Market leadership and its advantages

Market leaders are the firms with the highest market share in their industry. This position provides several competitive edges that can strengthen their operations and profitability.

Benefits of being a market leader

• Economies of scale - Larger operations enable cost savings, such as bulk purchasing or efficient production, reducing average costs per unit.
• Brand loyalty - Customers often prefer well-known brands, leading to repeat purchases and less sensitivity to price increases.
• Higher profits - With strong customer loyalty, leaders can charge premium prices without losing sales.
• Barriers to entry - Advantages like economies of scale and price leadership make it harder for new competitors to enter the market.
• Improved reputation - Attracts investors, high-quality employees, and partnerships with retailers who prefer stocking leading brands.
• Better survival chances - During economic crises, larger firms with substantial market share are more likely to endure due to their resources and stability.

How market share reveals market competitiveness

Market share data provides insights into the level of competition within an industry. By examining the distribution of market share among firms, it is possible to assess whether a market is highly competitive or dominated by a few players.

Using market share to analyse competition

• Concentration ratio - Adding the market shares of the largest few firms (e.g., the top three or five) shows market concentration. A high ratio indicates low competition, while a low ratio suggests a more competitive market.
• Competitive insights - Low market shares across many firms point to intense rivalry, encouraging innovation and lower prices.
• Strategic implications - Firms with small market shares may need aggressive tactics, like differentiation, to gain ground against leaders.

Example of market concentration

In this example, the top three firms hold 70% of the market, indicating high concentration and limited competition.

The impact of external changes on market share

External factors in the business environment can rapidly alter market share, even for established leaders. These changes highlight the need for firms to stay adaptable.

External factors affecting market share

• Economic crises - Downturns can reduce consumer spending, shifting market share towards firms with lower prices or essential products.
• Technological advancements - New innovations can disrupt markets, allowing smaller firms to gain share if leaders fail to adapt.
• Regulatory changes - New laws, such as trade restrictions, can favour or disadvantage certain firms, reshaping market dynamics.
• Competitor actions - Entry of new rivals or aggressive marketing by existing ones can erode a leader's share without warning.
• Global events - Factors like pandemics or supply chain issues can threaten survival, though market leaders often have the resources to recover more effectively.