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2.1 Market Share

Purpose: Key indicator of market competitiveness.

Market share is an indicator of how well a firm is doing against its competitors. This metric, supplemented by changes in sales revenue, helps managers evaluate both primary and selective demand in their market. That is, it enables them to judge not only total market growth or decline but also trends in customers' selections among competitors. Generally, sales growth resulting from primary demand (total market growth) is less costly and more profitable than that achieved by capturing share from competitors. Conversely, losses in market share can signal serious long-term problems that require strategic adjustments. Firms with market shares below a certain level may not be viable. Similarly, within a firm's product line, market share trends for individual products are considered early indicators of future opportunities or problems.

Construction

    Market Share: The percentage of a market accounted for by a specific entity.

    Unit Market Share: The units sold by a particular company as a percentage of total market sales, measured in the same units.

    Unit Market Share (%)=5 Unit Sales (#)/Total Market Unit Sales (#)

This formula, of course, can be rearranged to derive either unit sales or total market unit sales from the other two variables, as illustrated in the following:

Unit Sales (#) = 5 Unit Market Share (%) * Total Market Unit Sales (#)

Total Market Unit Sales (#) = 5 Unit Sales (#)/Unit Market Share (%)

Revenue Market Share: Revenue market share differs from unit market share in that it reflects the prices at which goods are sold. In fact, a relatively simple way to calculate relative price is to divide revenue market share by unit market share (see Section 7.1).

Revenue Market Share (%) = 5 Sales Revenue ($)/Total Market Sales Revenue ($)

As with the unit market share, this equation for revenue market share can be rearranged to calculate either sales revenue or total market sales revenue from the other two variables.

Data Sources, Complications, and Cautions

Market definition is never a trivial exercise: If a firm defines its market too broadly, it may dilute its focus. If it does so too narrowly, it will miss opportunities and allow threats to emerge unseen. To avoid these pitfalls, as a first step in calculating market share, managers are advised to define the served market in terms of unit sales or revenues for a specific list of competitors, products, sales channels, geographic areas, customers, and time periods. They might posit, for example, that "Among grocery stores, we are the revenue market share leader in sales of frozen Italian food entrées in the Northeastern U.S."

Data parameters must be carefully defined: Although market share is likely the single most important marketing metric, there is no generally acknowledged best method for calculating it. This is unfortunate, as different methods may yield not only different computations of market share at a given moment, but also widely divergent trends over time. The reasons for these disparities include variations in the lenses through which share is viewed (units versus dollars), where in the channel the measurements are taken (shipments from manufacturers versus consumer purchases), market definition (scope of the competitive universe), and measurement error. In the situation analysis that underlies strategic decisions, managers must be able to understand and explain these variations.

Competitive dynamics in the automobile industry, and at General Motors in particular, illustrate the complexities involved in quantifying market share:

"With market share sliding in the first two months of the year, from 27.2% to 24.9%––the lowest level since a two-month strike shut the company down in 1998––GM as a whole expects a net loss of $846 million the first quarter."2

Reviewing this statement, drawn from Business Week in 2005, a marketing manager might immediately pose a number of questions:

  • Do these figures represent unit (auto) or revenue (dollar) market shares?
  • Does this trend hold for both unit and revenue market shares at GM?
  • Was revenue market share calculated before or after rebates and discounts?
  • Do the underlying sales data reflect factory shipments, which relate directly to the manufacturer's current income statement, or sales to consumers, which are buffered by dealer inventories?
  • Does the decline in market share translate to an equivalent percentage decrease in sales, or has the total market size changed?

Managers must determine whether a stated market share is based on shipment data, channel shipments, retail sales, customer surveys, or some other source. On occasion, share figures may represent combinations of data (a firm's actual shipments, for example, set against survey estimates of competitors' sales). If necessary, managers must also adjust for differences in channels.

The time period measured will affect the signal-to-noise ratio: In analyzing short-term market dynamics, such as the effects of a promotion or a recent price change, managers may find it useful to measure market share over a brief period of time. Short-term data, however, generally carry a low signal-to-noise ratio. By contrast, data covering a longer time span will be more stable but may obscure important, recent changes in the market. Applied more broadly, this principle also holds in aggregating geographic areas, channel types, or customers. When choosing markets and time periods for analysis, managers must optimize for the type of signal that is most important.

Potential bias in reported shares: One way to find data for market sizing is through surveys of customer usage (see Section 2.7). In interpreting these data, however, managers must bear in mind that shares based on reported (versus recorded) sales tend to be biased toward well-known brands.

Related Metrics and Concepts

Served Market: That portion of the total market for which the firm competes. This may exclude geographic regions or product types. In the airline industry, for example, as of mid 2005, Ryan Air did not fly to the United States. Consequently, the U.S. would not be considered part of its served market.

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