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This chapter is from the book

2.2 Relative Market Share and Market Concentration

Purpose: To assess a firm's or a brand's success and its position in the market.

A firm with a market share of 25% would be a powerful leader in many markets but a distant "number two" in others. Relative market share offers a way to benchmark a firm's or a brand's share against that of its largest competitor, enabling managers to compare relative market positions across different product markets. Relative market share gains some of its significance from studies––albeit controversial ones––suggesting that major players in a market tend to be more profitable than their competitors. This metric was further popularized by the Boston Consulting Group in its famous matrix of relative share and market growth (see Figure 2.1).

Figure 2.1

Figure 2.1 The BCG Matrix

In the BCG matrix, one axis represents relative market share––a surrogate for competitive strength. The other represents market growth––a surrogate for potential. Along each dimension, products are classified as high or low, placing them in one of four quadrants. In the traditional interpretation of this matrix, products with high relative market shares in growing markets are deemed stars, suggesting that they should be supported with vigorous investment. The cash for that investment may be generated by cash cows, products with high relative shares in low-growth markets. Problem child products may have potential for future growth but hold weak competitive positions. Finally, dogs have neither strong competitive position nor growth potential.

Construction

Relative Market Share (I) 5 = Brand's Market Share ($,#)/Largest Competitor's Market Share ($,#)

Relative market share can also be calculated by dividing brand sales (#,$) by largest competitor's sales (#,$) because the common factor of total market sales (or revenue) cancels out.

Example: The market for small urban cars consists of five players (see Table 2.1).

Table 2.1 Market for Small Urban Cars

 

Units Sold (Thousands)

Revenue (Thousands)

Zipper

25

?375,000

Twister

10.0

?200,000

A-One

 7.5

?187,500

Bowlz

 5

?125,000

Chien

 2.5

 ?50,000

Market Total

50.0

?937,500


In the market for small urban cars, managers at A-One want to know their firm's market share relative to its largest competitor. They can calculate this on the basis of revenues or unit sales.

In unit terms, A-One sells 7,500 cars per year. Zipper, the market leader, sells 25,000. A-One's relative market share in unit terms is thus 7,500/25,000 or 0.30. We arrive at the same number if we first calculate A-One's share (7,500/50,000 = .15) and Zipper's share (25,000/50,000 5 .50) and then divide A-One's share by Zipper's share (.15/.50 = .30).

In revenue terms, A-One generates ?187.5 million in car sales each year. Zipper, the market leader, generates ?375 million. A-One's relative market share in revenue terms is thus ?187.5m/?375m, or 0.5. Due to its comparatively high average price per car, A-One's relative market share is greater in revenue than in unit terms.

Related Metrics and Concepts

    Market Concentration: The degree to which a relatively small number of firms accounts for a large proportion of the market. This is also known as the concentration ratio. It is usually calculated for the largest three or four firms in a market.3

    Three (Four) Firm Concentration Ratio: The total (sum) of the market shares held by the leading three (four) competitors in a market.

Example: In the small urban car market, the three firm concentration ratio is comprised of the market shares of the top three competitors—Zipper, Twister, and A-One (see Table 2.2).

Table 2.2 Market Share––Small Urban Cars

 

Units Sold (Thousands)

Unit Share

Revenue (Thousands)

Revenue Share

Zipper

25

50%

?375,000

40.0%

Twister

10.0

20%

?200,000

21.3%

A-One

7.5

15%

?187,500

20.0%

Bowlz

5

10%

?125,000

13.3%

Chien

2.5

5%

?50,000

 5.3%

Market Total

50.0

100%

?937,500

100%


In unit terms, the three firm concentration ratio is 50% 1 20% 1 15% 5 85%.

In revenue terms, it is 40% 1 21.3% 1 20% 5 81.3%.

    Herfindahl Index: A market concentration metric derived by adding the squares of the individual market shares of all the players in a market. As a sum of squares, this index tends to rise in markets dominated by large players.

Example: The Herfindahl Index dramatically highlights market concentration in the small urban car market (see Table 2.3).

Table 2.3 Calculation of the Herfindahl Index for Small Urban Cars

 

Units Sold (Thousands)

Unit Share

Herfindahl Index

Revenue (Thousands)

Revenue Share

Herfindahl Index

Zipper

25

50%

0.25

?375,000

40%

0.16

Twister

10.0

20%

0.04

?200,000

21%

0.0455

A-One

7.5

15%

0.0225

?187,500

20%

0.04

Bowlz

5

10%

0.01

?125,000

13%

0.0178

Chien

2.5

5%

0.0025

?50,000

5%

0.0028

Market Total

50.0

100%

0.325

?937,500

100%

0.2661


On a unit basis, the Herfindahl Index is equal to the square of the unit market share of Zipper (50% ^ 2 = 0.25), plus that of Twister (20% ^ 2 = 0.04), plus those of A-One, Bowlz, and Chien = 0.325.

On a revenue basis, the Herfindahl Index comprises the square of the revenue market share of Zipper (40% ^ 2 5 0.16), plus those of all its competitors 5 0.2661.

As demonstrated by the Herfindahl Index, the market for small urban cars is slightly more concentrated in unit terms than in revenue terms. The reason for this is straightforward: Higher-priced cars in this market sell fewer units.

Note: For a given number of competitors, the Herfindahl Index would be lowest if shares were equally distributed. In a five-firm industry, for example, equally distributed shares would yield a Herfindahl Index of 5 * (20% ^ 2) 5 0.2.

Data Sources, Complications, and Cautions

As ever, appropriate market definition and the use of comparable figures are vital prerequisites to developing meaningful results.

Related Metrics and Concepts

    Market Share Rank: The ordinal position of a brand in its market, when competitors are arranged by size, with 1 being the largest.

    Share of Category: This metric is derived in the same manner as market share, but is used to denote a share of market within a certain retailer or class of retailers (for example, mass merchandisers).

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