Market Share: Definition and Calculation Formula

What Is Market Share?

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

Key Takeaways to Note

• Market share represents the percentage of an industry's or market's total sales that a particular company earns over a specified period.
• Market share is calculated by dividing a company's sales by the industry's total sales over a period of time.
• The metric is used to give a general idea of the size of a company relative to its market and competitors.
• The market leader is the company in an industry with the highest market share and typically the most influence.
• Ways to grow market share include adopting new technology, building customer loyalty, and acquiring competitors.

Calculating Market Share

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

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

The market share calculation is often done for specific countries or regions, such as North America or Canada. Investors can get market share data from various independent sources, such as trade groups and regulatory agencies, and often from the company itself; however, some industries are more difficult to measure accurately than others.

Market Share Formula Market Share = Company's Total Sales / Industry's Total Sales

Benefits of Market Share

Investors and analysts closely monitor gains and losses in market share, as this can be a sign of the relative competitiveness of a company's products or services. When the total market for a product or service is growing, a company that maintains its market share will see its revenues increase at a rate that is in line with the total market. A company that increases its market share will see its revenues increase faster than its competition.

A gain or loss in market share can have a significant impact on a company's stock performance, depending on industry conditions.

A gain in market share can allow a company to achieve greater economies of scale with its operations and improve profitability. A company may attempt to expand its market share by lowering prices, using advertising, or introducing new or different products. In addition, it can also grow its market share by appealing to different audiences or demographics.

The Impact of Market Share

Changes in market share are more significant to the performance of companies in mature and traditional industries, where there is a steady growth in line with the general economy. Conversely, changes in market share are less important for companies operating in growth industries. In these industries, the total market is still growing, so companies can still increase sales even if they lose market share. For companies in this situation, stock performance is influenced more by customer and sales growth, and profit margins, if any, than factors like market share.

In cyclical industries, competition for market share is intense. Economic factors play a bigger role in the volatility of sales, earnings, and profit margins, than other factors. Margins tend to be slim, and operations run at maximum efficiency due to competition. Because sales come at the expense of other companies, they invest heavily in marketing efforts or even loss-leader products to attract sales.

In these industries, companies may be willing to take a loss on certain products temporarily to force competitors to drop out or file for bankruptcy. Once they achieve a greater market share and competitors are eliminated, they try to increase prices. This strategy can be successful, or it can backfire, adding to losses; however, this is why many industries are dominated by a few major players, such as discount wholesale retail with stores including Sam’s Club, BJ’s Wholesale Club, and Costco.

How Do Companies Grow Market Share?

A company can grow its market share by providing customers with cutting-edge technology, cementing customer loyalty, hiring talented employees, and acquiring competitors.

New Technology

Innovation is one method by which a company can grow market share. When a company brings a new technology to market that competitors don't yet have, consumers who want to own that technology will purchase it from that company, even if they had previously done business with a competitor. Many of those consumers become loyal customers, which increases the company's market share and decreases the market share of the company they switched from.

Customer Loyalty

By cementing relationships with customers, companies protect their existing market share by preventing current customers from switching when a competitor makes an attractive new offer. Even better, companies can grow their market share using the same simple tactic, as satisfied customers often talk about their positive experience with friends and relatives, who become new customers. Growing market share through word of mouth helps a company increase its revenues without incurring additional marketing expenses.

Good, Talented Employees

Companies with the highest market share in their industries almost always have the most talented and dedicated employees. Attracting the best employees helps to reduce the costs associated with replacement and training and allows companies to dedicate more resources to focus on their core competencies. Offering competitive salaries and benefits is a proven way to attract the best employees; however, 21st-century employees also look for intangible benefits such as flexible work schedules and a comfortable work environment.

Acquiring Competitors

Finally, one of the surest methods of growing market share is to acquire a competitor. By doing this, a company accomplishes two things. It taps into the existing customer base of the newly acquired company, and it reduces the number of companies that are competing for a piece of the same pie. Savvy executives, whether they are running small businesses or large corporations, are always looking for a good acquisition deal when their company is in a growth phase.

Market Share Examples

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

Apple's market share in China's smartphone market has fluctuated over the years. For example, in the third quarter of 2022, Apple captured 14% of the market. In the fourth quarter of 2023, it controlled 21% of the market.

What is market share? Market share shows a company's size, which is a useful metric for illustrating a company's dominance and competitiveness in a given field. Market share is calculated as a percentage of a company's sales relative to the industry's total sales over a period. A company's market share can significantly affect its operations, namely its stock performance, its size, and the pricing of its products or services.

Why is market share important? Simply put, market share is an important indicator of a company's competitiveness. When a company increases its market share, it can improve its profitability. This is because as companies increase in size, they can also scale, offer lower prices, and stifle the growth of competitors.

In some cases, companies may take a loss on certain parts to push competitors out of business or force them into bankruptcy. Afterward, the company can gain market share and raise prices in addition. In financial markets, market share can significantly affect stock prices, especially in cyclical industries where profit margins are slim and competition is fierce. Any noticeable differences in market share can cause weakness or strength in investor perception.

What strategies are used to gain market share? To gain a larger market share, a company can employ one of many strategies. First, it can introduce new technology to attract customers who may have bought from a competitor. Second, nurturing customer loyalty is a tactic that can create a firm existing customer base and expand through word of mouth. Third, hiring talented employees prevents costly employee replacement costs, allowing the company to prioritize its core competencies. Finally, with an acquisition, a company can reduce the number of competitors and gain their customer base.

How is market share measured? To determine a company's market share, you divide its total sales by the industry's total sales for a given period. For example, if a company sold $2 million in dishwashing detergent and the industry's total sales were $15 million, the company would have a market share of 2/15 = 13.3%.

What is a low market share? A low market share is considered to be less than half of the industry leader's market share. So, if the industry leader has a 40% market share and another company has a 10% market share, that company would be considered to have a low market share because 10% is less than 20% (half of 40%).

Conclusion

Market share is the percentage of an industry's total sales that a company has. The higher the market share, the more sales the company has compared to its competitors in their industry. Market share indicates a company's size and its level of influence within an industry. It can also be an indicator of growth and success.

Companies often seek to increase their market share. Ways to do this are by adopting new technology, offering higher-quality products, having a good marketing strategy, acquiring competitors, and creating customer loyalty.