Market Share is a very useful indicator for startups and companies. Knowing it allows you, for example, to have idea a clearer of the strength and prospects of the business you have started.
In this guide you will discover in detail (but in simple words) what Market Share is and why it is so important to know its value, how to calculate it, and how to increase it. Are you ready? Let’s get started!
What is Market Share and why it matters
Market Share is the percentage of the market that is served by the company. This value can be expressed in terms of sales or in terms of volume, i.e., in terms of quantities sold.
Market Share is an important parameter for investors: through it, they assess a startup’s growth potential and the skills management of its team.
As mentioned, Market Share is also very useful however, for startuppers (and entrepreneurs in general), because it gives useful information about the strength and prospects of the chosen business model. In termsmore concrete , it indicates whether the strategies put in place are leading the startup or company to hold the market positiondesired .
You should know, however, that the information provided by the Market Share only really makes sense when supplemented with that of other indices. In fact, your startup’s or company’s sales growth may depend on various factors, such as increased demand or erosion of Market Share of your competitors.
Differences between Absolute and Relative Market Share
Now that you know what Market Share is, you need to know the difference between Absolute and Relative Market Share.
If you want to calculate your startup’s market potential, you should know that Absolute Market Share does not give you an accurate idea of your startup or company’s competitive position in the market because a 30 percent share, for example, may indicate a strong position if the other 70 percent of the market is fragmented, while it signals a weak position if 70 percent is all in the hands of another competitor.
To get more accurate information, therefore, you need to relate your value to that of your competitors. That is, you must rely on Relative Market Share, which is the market share held by a company relative to that held by its main competitor.
How to Calculate Market Share
To calculate Market Share, as mentioned above, you must first choose the parameter to be considered: turnover or the quantity of goods sold. In this regard, you should know that turnover provides a more objective figure, since it considers the different price levels at which companies might sell the same product.
Basic formula for calculation
Regarding turnover, the basic formula for calculating market share is as follows:
\(Market\hspace{0.1cm}Share=(\frac{Company\hspace{0.1cm}turnover}{Total\hspace{0.1cm}market\hspace{0.1cm}turnover})x100\)
As for quantity sold, however, the basic formula for calculating market share is:
\(Market\hspace{0.1cm}Share=(\frac{Total\hspace{0.1cm}company\hspace{0.1cm}sales}{Total\hspace{0.1cm}industry\hspace{0.1cm}sales})x100\)
Practical example of Market Share calculation
A practical example will help you better understand how to calculate the Market Share of your startup or company. In this case, the parameter chosen is turnover.
Let’s say there are three companies in the market, which, over a 12-month period, bill in this way:
- Company 1: 500,000 euros
- Company 2: 150,000 euros
- Company 3: 100,000 euros
The total market value is, therefore, 750,000 euros.
The market shares of the three companies, however, are:
\(Company\hspace{0.1cm}1=(\frac{500.000€}{750.000€})x100=67\%\)
\(Company\hspace{0.1cm}2=(\frac{150.000€}{750.000€})x100=20\%\)
\(Company\hspace{0.1cm}3=(\frac{100.000€}{750.000€})x100=13\%\)
Graphical representation of the calculation
Regarding the the Market Share calculation, you should know that the best way to visualize the shares of the various firms within the market is by using a graphical representation of circular pie chart.
The width of the different slices of the pie identifies the value of the different shares. There is often a slice of the pie called “Other,” which encloses within it the market shares of smaller firms.
Collection and analysis of necessary data
There is no one-size-fits-all way to collect the data needed to calculate your startup’s or company’s Market Share, since the way data is collected (and analyzed) varies depending on the industry to which the company belongs.
In some cases you can refer to industry studies done by research firms, while in others it is the trade associations that make this data available. The third avenue available to you is corporate financial statements.
Challenges and Difficulties in Calculating Market Share
To get to the point of calculating the Market Share of your startup or company, you have to overcome some challenges. There are, essentially, four main difficulties you may face when you find yourself having to calculate your Market Share:
- Precisely define the market;
- Choosing the right parameters;
- Identify an appropriate time frame;
- retrieve the necessary information.
Trends and changes in Market Share over time
We have just said it: identifying an appropriate time frame that allows the Market Share to be calculated and analyzed is very important. It is so because, in order to evaluate the effectiveness of business strategies (and possibly correct them in light of new trends), it is necessary to see how the firm’s Market Share changes over months (or years).
In this regard, it is important for you to know that, in general, the time horizon that is taken as a reference for the calculation of Market Share is the calendar year.
Impacts of new market trends
We cannot end this guide devoted to Market Share without recalling Seth Godin‘s famous phrase:
“Market Share is gained from products that customers love, not products that executives love.”
Being able to intercept new trends market must be a categorical for you imperative if you want to maintain or increase your Market Share.
Equally important is to continue to innovate (i.e., introduce new features and new products or services) so you can expand the reach of your startup or company. In fact, companies that succeed in introducing new and innovative products to the market tend to have larger market shares because consumers are often attracted to new and unique products.
The final advice for you from a Market Share perspective, then, is to use the data you have, feedback from your customers, and analysis of competitors in the marketplace to develop new products or services that can meet new consumer needs or desires.
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