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Market share and why it matters
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If you’ve gone through a financial news article about a company or followed business news, you would have likely come across the term ‘market share’. Have you wondered what it is and why it is considered to be such a big deal for businesses? If you have, then that’s exactly what we’re going to be looking at in this chapter of Smart Money. So, let’s begin this new chapter with a short overview of what market share actually is.
What is market share?
The concept of market share is quite simple to understand. It basically denotes the percentage of sales that a company operating in an industry generates, in relation to the total sales of that industry. Market share is a really good metric that allows you to quickly gauge the size of a company within an industry. That’s not all. It also gives you a fair idea of the amount of influence that the company has on the industry as a whole. The higher the market share, the bigger the size of a company in the said industry and the higher the influence it has on that industry.
Still confused? Here’s a small example to help you understand it better. For instance, when they say that the market share of a Company ABC operating in the IT industry is 55%, what does that tell you? It essentially tells you that out of the total sales generated by the entirety of the IT industry, the said company contributes 55%. This doesn’t give much of a perspective about the size of the company, does it?
Okay, here’s some more information that might help. Say there are a total of 8 companies operating in the IT industry including Company ABC that we saw above. Now, considering the fact that the said company generates 55% of the total sales made by the IT industry, the remaining 45% is generated by all the 7 other companies in the industry - together. See how this changes the entire perspective of the company? The company with 55% market share must be enormous, since it is completely dominating the IT industry market.
How is the market share of a company calculated?
So, how do you arrive at the market share percentage of a company? It’s simple. You apply this formula.
Market share = (Sales made by a company ÷ Total sales in its industry) x 100%
Let’s apply this formula on a set of hypothetical data now, shall we?
Assume that there’s a company operating in the cell phone manufacturing industry. The total sales generated by it during a year amount to Rs. 2.68 crores, while the total sales of the industry as a whole during the same year comes up to Rs. 15.7 crores. Now, applying the formula above, we can easily estimate the market share of the company.
Market share = (Rs. 2.68 crores ÷ Rs. 15.7 crores) x 100% = 17%
Going by this market share calculation, the company commands a market share of about 17% in the cell phone manufacturing industry.
Example of a company with good market share
For this section, we’ll take up the Indian passenger car industry and check how the various companies operating in that industry fare in terms of market share.
There are 14 major passenger car manufacturers in India. This list includes only those manufacturers who have a production facility in India. It doesn’t include the companies that sell cars that are imported into the country. Here’s how they stand in terms of market share as of April to October 2020.
(Data source: Economic Times)
As you can see from this pie chart, Maruti Suzuki is the leader when it comes to the passenger vehicle industry, with a market share of 52.5%. The second position goes to Hyundai, with a market share of 19.6%. Here are some other things to note:
- The market share of all of the other vehicle manufacturers comes in at single digits.
- The market share gap between the first and the second position is also extremely huge.
- Maruti Suzuki has a share exceeding 50%, but the remaining 47.5% industry market share is shared between 13 other companies.
- From this data, it is quite evident that Maruti Suzuki is in an unassailable position in the industry and is completely dominating the space.
Why is market share important?
Analyzing the market share of the companies in an industry can give you some deep insights into its revenue and profit generating potential. However, that’s not the only reason why market share is important. Here are a few more reasons why.
1. For gauging the effectiveness of a company’s marketing efforts
Companies can use market share as a reliable indicator to measure the performance of its marketing efforts. If a company’s market share increases over time, it could mean that the entity’s marketing strategy is successful. On the other hand, if a company’s market share decreases over a period of time, it could indicate flaws in its marketing and may even point to a need for a change in strategy.
2. For ascertaining a company’s position in the market
As you’ve already seen from the above segments of this chapter, a company’s position in the market can be easily ascertained by just taking a look at the market share data for that particular industry. The company with the maximum market share is considered the market leader.
And market leaders tend to shape the trajectory of the industry through their products and marketing efforts. That’s not all. Market leaders also usually tend to constantly innovate to prevent other companies from grabbing their market share.
3. For ascertaining a company’s profitability
Companies with high market shares tend to sell more products. And this has a positive impact on their profitability. Also, market leaders tend to have higher economies of scale, which helps them cut costs and run their operations in a far more effective manner. This also has a positive effect on their profit margins.
4. For determining the market structure
The market share data of an industry is widely used to determine the market concentration ratio. This is then used to ascertain whether a company is operating in a monopolistic or oligopolistic structure. For instance, if a company commands a market share of 90% or above, then the market structure is construed as being monopolistic in nature.
How can a company increase its market share?
The most encouraging thing about market share is that it is fluid and ever-changing. A company that’s currently dominating an industry may be relegated to either the third or fourth position in just a matter of a few years. That’s why most companies always tend to focus a lot of their resources and efforts towards increasing their market share. But how do they do that? Let’s find out.
1. By increasing economies of scale
As you’ve already seen above, higher economies of scale translates to higher efficiency and lower costs. And so, by increasing their economies of scale companies can cut their costs, which would consequently translate to lower product prices and increased demand.
2. By increasing their reputation
Reputation and strong brand equity plays a huge role when it comes to increasing a company’s market share. A company with durable products and a proactive sales and after-sales system tends to enjoy a strong reputation amongst the public. This can help enhance its market share tremendously. Case in point, the tech giant - Apple.
3. By building their negotiating power
The higher the negotiating power for a company is, the better their market share is likely to be. For instance, a company can enjoy lower input prices and better credit facilities by bargaining its way with its suppliers. This can lead to lower product prices and in turn, higher demand. And by seeing an increasing demand for its products, the company will naturally gain market share.
4. By modifying their products and services
Companies that are constantly innovating, adding new features, and enhancing their products and services tend to enjoy higher sales. And to increase its market share, a company could simply improve upon its products and services to drive up demand and sales.
5. By building their distribution channels
Enhancing a company’s distribution channels is another great way to increase market share. Setting up new distribution channels in areas that the company hasn’t expanded into can help unlock a wider customer base. And access to a wider customer base will eventually help the company increase its sales and thereby, its market share.
6. By intensifying their marketing efforts
Marketing is one of the most important ways in which a company can increase its market share. Marketing, when done right, has the ability to attract customers, build a loyal fan base, and enhance the brand’s reputation and brand equity. Such an exercise would undoubtedly lead to better sales and higher market share.
With this we’ve finally come to the end of yet another chapter of this module. In the next chapter, we’re going to be dealing with the concept of growth-share matrix, also known as the BCG matrix. Keep reading and keep learning.
A quick recap
- The concept of market share basically denotes the percentage of sales that a company operating in an industry generates, in relation to the total sales of that industry.
- Analyzing the market share of the companies in an industry can give you some deep insights into its revenue and profit generating potential.
- Companies can use market share as a reliable indicator to measure the performance of its marketing efforts.
- The company with the maximum market share is considered the market leader.
- Companies with high market shares tend to sell more products. And this has a positive impact on their profitability.
- The market share data of an industry is also widely used to determine the market concentration ratio and identify the market structure.
- Companies can increase their market share by improving their economies of scale, building their reputation and negotiating power, modifying their products and services, improving their distribution channels and strengthening their marketing.
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