What is market share?

Last Updated: 12 Dec 2023

With optimistic trends and unprecedented availability of resources, India is on the verge of an economic revolution backed by far-reaching and innovative companies that are changing the mindset and methods of business in India. With the advent of numerous unicorn startups, there is healthy competition between companies to tap the market’s extensive potential and win the race of capturing a higher and better market share.

You may have heard numerous times about companies being valued for their sales. As every company in the market sells specific products or services, these companies are valued compared to the total volume of sales. For a clearer understanding of market share and market share definition, read on.

Understanding Market Share

Market share is the percentage of sales made by a particular company compared to the total sales in that specific sector. Market share definition is better understood by taking the company’s total sales and dividing it by the total sales of that particular sector in a given period. In the market share segment, this metric is used to understand a company’s performance over time against its peers. It gives a general idea of a company’s sector-wise profitability and identifies a market leader with the highest percentage of sales.

Calculating Market share

Almost every company that plans to grow and expand keeps track of its sales to understand its performance and identify sales gaps. Companies have numerous professionals to calculate these metrics and use them to compare their performance to their previous quarters. This comparison allows companies to know if they are growing or lagging. However, the problem arises when there is a need to calculate/know the total sales of the relevant sector. A company seeking to know its market share for its business turn to the following factors to know the total sales:

• Total sales data is collected by the government in its economic census every four years.
• Sampling surveys by the government to calculate the rise in economic activities.
• Sales data is accumulated by a regulatory agency or an industry association.

Once you know the total sales of a particular sector that a company belongs to, you can follow the below steps to calculate a company’s market share.

Step 1: Determining the relevant period
The first step in defining the market share is to determine a specific period. Mostly, companies share their performance and earnings data for every quarter. However, you can identify a company’s market share based on a fiscal quarter, half-yearly, annually, or in multiple years.

Step 2: Calculate the company’s total sales.
A company’s total sales are calculated by adding the value of all the company invoices within your chosen relevant period before making gross adjustments. Gross adjustments include refunds, returns, customer discounts, etc. Once you have added all the invoices, you get the final number of total sales.

Step 3: Calculation of the market share
Once you have data about the company’s total sales and the sector’s total sales, you can calculate the company’s market share. For the calculation, divide the company’s total sales by the sector’s total sales. For example, if the company’s total sales are Rs 1,00,000 and the sector’s total sales are Rs 10,00,000, the company’s market share will be 10%, i.e. 1,00,000/10,00,000*100.

Importance of Market share

Every company’s goal is to increase its market share, which they believe is one of the most vital aspects of its success path. Its belief holds because of the following importance of market share:

• Economies of Scale: A company with a higher market share is better positioned in the market to operate on a greater scale and increase profitability. As they have a better reach and large set of customers, the company is well-positioned to develop a cost advantage and increase sales further.
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• Increased customer base: A rise in a company’s market share helps to further improve its customer base. As customers tend to buy products from bigger companies, market share helps in more visibility and word of mouth, thereby adding new customers.
• Goodwill: Potential customers associate a higher market share company with better quality products. They believe that it has captured a higher market share only because its products and services are good. It results in increasing the company’s goodwill and promotes brand advocacy.
• Increased bargaining power: A company is in a better place to dominate the sector if it has a high market share. The company has the upper hand to set prices and be a trendsetter to let other companies follow its lead in the future.

Types of Market Share

Mainly, there are two types of market shares:

• Value Market Share: This approach calculates the market share based on the value of the sales. For example, if a company sold Rs 10,00,000 worth of cars, the market share is calculated based on this value. Suppose the total value sales of the sector for a given period is 30,00,000. In this case, the market share of the company will be calculated as 3%, i.e. Rs 10,00,000/30,00,000*100.
• Volume Market Share: This method ditches the total value of sales and calculates the market shares based on the number of units sold or the number of customers offered service. For example, if a company sells 1,00,000 cars in a given period and the total number of units sold was 30,00,000, the market share will be 30%, i.e. 1,00,000/30,00,000*100.

How can companies increase market share?

Every company that is a market leader in its sector started as a small company once. There are numerous tried and true ways through which a company can increase its market share:

Companies can look to better their products/services, internal policies, and customer experience to increase their market share and ensure high profitability in the future. As customers relate high market share with better quality products/services, it is more than justified that capturing increased market share is the priority of almost every company.

• Innovation: Companies that innovate can provide their customers with new and effective products/services. If a company has innovative products, the customers tend to choose those products over their competitors. This innovation, over time, can allow companies to increase their market share.
• Customer Relationship: Customer relationship or post-sales experience is one of the most important aspects for a company to increase its market share. If two companies have the same quality products, customers will always choose the one which has a better customer experience. Thus, increasing sales and the market share.
• Skilled workforce: A company can increase its market share by hiring skilled employees that can contribute to higher sales for the company. Companies can also hire former employees of their competitors who know how the stock market works and operates, providing better insights into increased profitability.
• Acquisitions: An ideal and effective way to increase market share is to acquire small businesses/competitors. It can allow a company to overtake the acquired company’s customer base, sales, and market share.
• Marketing: This is a great way to promote a company’s products/services and spread the word about the brand. A company can ensure an increased market share through social media marketing, SEO-based content creation, advertisements, podcasts, paid promotions, etc.

Frequently Asked Questions

What is an example of a market share?

Let’s say that a company’s total sales by value in the last year were Rs 5,00,000 and the total sales by the value of the whole sector were Rs 30,00,000. In this case, the market share of the company will be 6%. It is calculated as 5,00,000/30,00,000*100.

How do we calculate market share?

There are two ways to calculate market share: By value and by volume.

• By Value: Revenue Market Share = Value of Company’s Total Sales ÷ Value of Total Market sales * 100
• By Volume: Unit Market Share = Number of Units Sold by Company ÷ Number of Units sold in the Whole Market * 100

What are the impacts of market share?

The market share of a company can have an impact on the following factors:

• Profitability
• Customer base
• Stock price
• Brand and goodwill
• Sales of its competitors