Marketing Glossary / Market Share
Market Share
What Is market share, and how do you increase it?
In a perfect world, companies would be able to measure their market position and reliably increase it over time. In the real world, however, understanding market share is a complex pursuit, and increasing it requires you to consistently outperform your competition across a number of metrics.
Fortunately, companies wanting to measure and increase market share have a wide array of tools and strategies at their disposal.
In this article, we'll break down the fundamentals of market share, how to effectively measure it, and the five most reliable strategies for increasing market share over time.
What Is Market Share?
Market share as a business metric is typically used for:
Competitive Benchmarking: Market share provides a clear measure of how a company is performing relative to its competitors. It enables businesses to benchmark their success in the marketplace and identify their standing within the industry.
Understanding Market Growth: Market share can provide insight into market growth or contraction. If a company's sales are increasing but market share is declining, it could indicate that the market is growing overall, but the company is not keeping pace.
Investor Relations: Market share is a common metric used by investors and analysts to assess a company's competitiveness and potential for growth. A strong market share can attract investment and positively impact stock prices.
Market share can be calculated in several ways, but the most common method is to divide the company's total sales over a specific period of time by the total sales of the industry over the same period. This calculation gives the company's market share as a percentage of the total market.
The Market Share Formula: How To Calculate Market Share
The formula for market share is:
Market Share = (Company's Total Sales / Total Industry Sales) x 100
For example, if a company sold 100,000 units in a year, and 1,000,000 units were sold in the entire market in that year, then the company's unit market share would be 10% (100,000 divided by 1,000,000).
The company's total sales can be found in its financial reports, while the total industry sales can be obtained from industry reports, market research firms, or trade associations. The result will be a percentage that represents the company's share of the total market.
How To Increase Market Share
1. Mergers and Acquisitions
The fastest way to increase market share is to purchase it through mergers and acquisitions. By acquiring or merging with other companies in the same market, businesses can expand their customer base, consolidate industry position, and achieve economies of scale.
On the other hand, this strategy is costly, complex, and time-consuming, with regulatory hurdles to overcome. Integration challenges like cultural clashes, employee turnover, and operational disruptions can even result in a decrease in overall company performance.
2. Marketing and Promotion
The most straightforward route most companies take to increase market share is marketing. By building marketing channels that consistently promote the company’s brand and products, businesses can grow their visibility, attract new customers, and increase their market share.
On the other hand, marketing success is tied to the company’s product/market fit, and focusing too much on marketing can distract a company from other critical aspects such as product quality, customer service, and operational efficiency, which are equally important for sustainable market share growth.
3. Product Innovation and Development
Speaking of product/market fit, companies that consistently innovate and develop their products to match or define market demand tend to command a larger market share. By offering unique features, better performance, or improved quality, companies can differentiate their products from competitors.
On the other hand, innovation often requires significant investment with no guaranteed return. Additionally, in the absence of strong marketing, product developments can go unnoticed by consumers or be quickly copied by competitors.
4. Strategic Pricing Strategies
Pricing can significantly influence a product's marketability and can be manipulated to impact market share. Once such strategy is penetration pricing, where a product is introduced to the market at an extremely low price in order to rapidly capture market share, before gradually increasing the price to more sustainable levels. Another strategy is price skimming, where a first-to-market product is priced higher and then gradually reduced over time.
On the other hand, pricing manipulation can result in price wars that erode margins, it can confuse customers and damage brand reputation, and it can negatively impact the market’s perception of a product or brand’s quality.
5. Distribution Strategies
Optimizing distribution can significantly increase market share. This may involve expanding into new geographical areas, partnering with retailers or distributors, or enhancing online sales platforms. The goal is to make the product readily available to as many customers as possible, in the most convenient locations.
On the other hand, expanding distribution networks can be costly and complex, potentially leading to supply chain inefficiencies and inventory management issues. Reliance on third-party distributors also reduces direct control over the customer experience.
Complex Factors Affecting Marketing Share
Impact of Market Trends
While it is beneficial to know your overall share of the market, it's equally important to observe trends affecting the market landscape. A company might feel secure in having a large share of a dwindling market, which could spell trouble in the long run.
Alternatively, a relatively small share in an exploding market can represent significant growth opportunities. Regular trend analysis can help businesses identify these situations early and adjust their strategies accordingly.
Influence of External Factors
Similar to market trends, external factors like economic conditions, regulatory changes, and technological advancements can influence both the market size and a company's position within it.
For example, a recession can shrink the market size, whereas favorable regulation or a technological breakthrough can lead to market expansion. Awareness of these external influences can aid businesses in better predicting market trends and adjusting their strategies to maintain or grow their market share.
Market Share Across Customer Segments
While overall market share can be a useful metric, some of the most important insights come from understanding the specific customer segments that are most contributing to growth or decline. These segments could be based on geographic regions, demographic groups, or product categories.
For instance, a company might have a smaller overall market share but could be leading in a particular region or demographic. Alternatively, a company might have a dominant market share in one product category but minimal presence in others. Understanding these nuances can guide strategic decision-making and help in identifying areas of strength and potential growth.
Limitations of Market Share As A Reporting Metric
While market share is a commonly tracked and reasonably useful metric, it does have several limitations.
Depends on accurate data: Market share assumes all sales are accurately recorded and reported. This may not be true, especially in markets where there's less control and formality.
Doesn’t include profitability: Market share doesn't tell us anything about a company's profits. A company might have a big market share but low profits due to high costs or inefficient operations.
Doesn’t assess customer satisfaction: A large market share doesn't guarantee that customers are happy. Companies might have lots of sales because of strong marketing, but suffer from high churn as customers aren’t pleased enough to stick around long term.
Doesn’t factor in market trends: Market share doesn't consider changes in the market. Things like customer preferences, new technologies, and changes in regulations can greatly affect a company's future success, but market share doesn't capture these dynamics.
While market share is a helpful measure, it doesn't tell the whole story. To get a full picture of a company's performance, businesses need to look at a broader list of metrics beyond market share or any other single metric.
Share of Market vs Share of Voice
Share of Voice is a metric that measures a brand's visibility or presence in the market. Specifically, it refers to the proportion of advertising or media mentions a brand receives compared to its competitors.
It's typically used in the context of paid media, where it refers to the percentage of an advertiser's ads compared to the total number of ads in its industry. For instance, if a company's ads are displayed 1,000 times in a market where 10,000 ads are displayed in total, the company's share of voice is 10%.
Share of Market is another way to say “market share” and as we’ve discussed previously in this guide, it measures actual sales performance relative to the market.
Share of Voice can be compared and contrasted with Share of Market in order to identify whether changes in market share are due to an increase or reduction in relative advertising, or if other factors outside of marketing are influencing said changes.
Total Addressable Market (TAM)
Total Addressable Market (TAM) is a term used to describe the overall revenue opportunity available for a product or service, assuming 100% market share. In other words, it's the total amount of money a business could make if it completely dominated its market.
TAM is a frequently used metric for founders and investors who are attempting to understand the potential scale of a market. It's particularly important for startups and companies looking to launch new products or services, as it allows them to estimate the potential business opportunity of a new market, and most importantly, sell investors on that potential.
That said, it's important to note that TAM represents an ideal scenario, and in practice, no company can capture 100% of the market.
Businesses often also consider the Serviceable Available Market (SAM) which represents the segment of the TAM served by a company's products or services, and the Serviceable Obtainable Market (SOM) which is the realistic market share a company can aim to achieve in the short term considering various constraints.
Risks of Pursuing Increased Market Share
Given the universal drive to grow, it’s commonly believed that a larger market share always equates to superior profitability. This is a myth.
While a larger market share can lead to increased sales and brand recognition, it does not guarantee higher profits. It is not uncommon for companies with smaller market shares to outperform their larger competitors in terms of profitability.
The following risks are always present when a company attempts to expand.
Overextending Company Resources
In the pursuit of a larger market share, there is a risk of overextending the company’s resources. This could be in the form of overly aggressive expansion, overspending on marketing, or entering too many markets at once. These activities can strain a company's financial health and organizational capacity, potentially leading to losses and instability.
Ignoring Financial Health
A single-minded focus on market share can lead a company to overlook critical aspects of its financial health, particularly profit margins. For instance, companies might lower prices or increase spending to attract more customers, but if these strategies erode profit margins, the long-term financial sustainability of the business can be compromised.
Sacrificing Core Customers, Products, or Brand Identity
Aiming for a larger market share can sometimes lead to a loss of focus on a company's core customers or product line. Companies may start catering to a broader audience or diversifying their products too much, which could dilute their brand identity and value proposition. This can alienate existing customers and potentially harm the company's reputation and performance.
While increasing market share is often a worthy goal, it's important for companies to approach this objective strategically and mindfully, being aware of these potential risks.
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