Market Share

What Is Market Share?

Market share is the percent of total sales in an industry generated by a particular company. Market share is calculated by taking the company's sales over the period and dividing it by the total sales of the industry over the same period. This metric is used to give a general idea of the size of a company in relation to its market and its competitors. The market leader in an industry is the company with the largest market share.

Understanding Market Share

A company's market share is its portion of total sales in relation to the market or industry in which it operates. To calculate a company's market share, first determine a period you want to examine. It can be a fiscal quarter, year, or multiple years.

Next, calculate the company's total sales over that period. Then, find out the total sales of the company's industry. Finally, divide the company's total revenues by its industry's total sales. For example, if a company sold $100 million in tractors last year domestically, and the total amount of tractors sold in the U.S. was $200 million, the company's U.S. market share for tractors would be 50%.

The calculation for market share is usually done for specific countries or regions, e.g. companies will report their North American or Canadian market share. Investors can obtain market share data from various independent sources, such as trade groups and regulatory bodies, and often from the company itself. However, some industries are harder to measure with accuracy than others.

Benefits of Market Share

Investors and analysts monitor increases and decreases in market share carefully as this can be a sign of the relative competitiveness of the company's products or services. As the total market for a product or service grows, a company that is maintaining its market share is growing revenues at the same rate as the total market. A company that is growing its market share will be growing its revenues faster than its competitors.

Gains or losses in market share can have significant impacts on a company's stock performance, depending on industry conditions.

Market Share Impact

Changes in market share have a larger impact on the performance of companies in mature or cyclical industries where there is low growth. In contrast, changes in market share have less impact on companies in growth industries. In these industries, the total pie is growing, so companies can still be growing sales even if they are losing market share. For companies in this situation, the stock performance is more affected by sales growth and margins than other factors.

In cyclical industries, competition for market share is brutal. Economic factors play a larger role in the variance of sales, earnings, and margins, more than other factors. Margins tend to be low and operations run at maximum efficiency due to competition. Since sales come at the expense of other companies, they invest heavily in marketing efforts or even loss leaders to attract sales.

In these industries, companies may be willing to lose money on products temporarily to force competitors to give up or declare bankruptcy. Once they gain greater market share and competitors are ousted, they attempt to raise prices. This strategy can work, or it can backfire, compounding their losses. However, this is the reason why many industries are dominated by a few big players, such as discount wholesale retail with stores including Sam's Club, BJ's Wholesale Club, and Costco.

How Can Companies Increase Market Share?

A company can increase its market share by offering its customers innovative technology, strengthening customer loyalty, hiring talented employees, and acquiring competitors.

New Technology

Innovation is one method by which a company may increase market share. When a firm brings to market a new technology its competitors have yet to offer, consumers wishing to own the technology buy it from that company, even if they previously did business with a competitor. Many of those consumers become loyal customers, which adds to the company's market share and decreases market share for the company from which they switched.

Customer Loyalty

By strengthening customer relationships, companies protect their existing market share by preventing current customers from jumping ship when a competitor rolls out a hot new offer. Better still, companies can grow market share using the same simple tactic, as satisfied customers frequently speak of their positive experience to friends and relatives who then become new customers. Gaining market share via word of mouth increases a company's revenues without concomitant increases in marketing expenses.

Talented Employees

Companies with the highest market share in their industries almost invariably have the most skilled and dedicated employees. Bringing the best employees on board reduces expenses related to turnover and training, and enables companies to devote more resources to focus on their core competencies. Offering competitive salaries and benefits is one proven way to attract the best employees. However, employees in the 21st century also seek intangible benefits such as flexible schedules and casual work environments.

Acquisitions

Lastly, one of the surest methods to increase market share is acquiring a competitor. By doing so, a company accomplishes two things. It taps into the newly acquired firm's existing customer base, and it reduces the number of firms fighting for a slice of the same pie by one. Shrewd executives, whether in charge of small businesses or large corporations, always have their eye out for a good acquisition deal when their companies are in a growth model.

Real-World Example of Market Share

All multinational corporations measure success based on the market share of specific markets. China has been an important market for companies, as it is still a fast-growing market for many products. Apple Inc., for example, uses its market share numbers in China as a key performance indicator for the growth of its business.

Apple's market share for China's smartphone market share fell 16% between 2018 and 2019, mostly due to lower iPhones sales. Existing trade tensions between the U.S. and China risk tariffs which can increase the cost of goods and impact the gross margin. Apple sales were down in China again in 2020, losing another 8% in market share, due to decreased sales in iPhones and a weak foreign currency rate relative to the U.S. dollar.

What Is Market Share?

Market share shows the size of a company, a useful metric in illustrating a company’s dominance and competitiveness in a given field. Market share is calculated as the percentage of company sales compared to the total share of sales in its respective industry over a time period. A company’s market share can influence its operations significantly, namely, its share performance, scalability, and prices that it can offer for its product or services. 

Why Is Market Share Important?

Simply put, market share is a key indicator of a company’s competitiveness. When a company increases its market share, this can improve its profitability. This is because as companies increase in size, they too can scale, therefore offering lower prices and limiting their competitors' growth.

In some cases, companies may go so far as operating at a loss in some divisions in order to push out the competitors or force them into bankruptcy. After this point, the company may increase its market share, and further increase prices. In financial markets, market share can greatly affect stock prices, especially in cyclical industries when margins are narrow and competition is fierce. Any marked difference in market share may trigger weakness or strength in investor sentiment. 

What Strategies Are Used to Gain Market Share?

To gain greater market share, a company may apply one of many strategies. First, it may introduce new technology to attract customers that may have otherwise purchased from their competitor. Second, nurturing customer loyalty is a tactic that can result in both a solid existing customer base and expansion through word of mouth. Third, hiring talented employees prevent costly employee turnover expenses, allowing the company to instead prioritize its core competencies. Finally, with an acquisition, a company can both reduce the number of competitors and acquire their base of customers.