What Is Market Share Formula?
Market share can represent the percentage of the market’s total revenue or industry that a particular firm shall earn over a specified period. It is a metric used to measure the total revenue the company earns compared to the market where it operates.
The formula used to calculate the market share shows what is the percentage of the portion of the total market that the company is controlling. It helps the business understand and identify its position in the total market in terms of competitiveness and indicate the level of business performance over a period of time.
Table of contents
- Market share may be the proportion of a market’s overall revenue or industry that a particular company will generate over a given period.
- A large percentage of market share is a significant predictor of corporate success, significantly if that market share is increasing.
- When a company gains a significant market share, it may be subject to rules and regulations, including anti-competition legislation. According to the regulations, the government may only allow them to complete the planned mergers if they have a substantial market share. As a result, a decrease in competition in that industry.
Market Share Formula Explained
The total market share formula is a financial metric companies use to evaluate the position of the business in the entire market or industry where it is operating in terms of competitiveness, revenue, or customer base. The company captures the information for a specific period using the relative market share formula, which is used as a benchmark to assess the business’s health and identify areas for improvement.
Market share can be calculated using the below formula:
Market Share = Company’s Revenue (Sales)/Entire Market Revenue (Sales)
The above formula shows that the total revenue earned by the company is divided by the entire market revenue in order to get the market share. The management can use the above formula to understand the growth and performance of the company over a period of time. However, the value depends on the type of market the company is operating in, the category of products being produced, and the time frame for the analysis.
How To Calculate?
To calculate the market share using the relative market share formula, follow the below steps.
- To calculate a firm’s market share using the revenue market share formula, one needs to be clear about the period, which shall be either a year, FiscalThreefiscal quarter[/wsm-tooltip], or several years. Then the next step is to calculate the firm’s total revenue over that period.
- The second last step would be to find out the total revenue of the firm’s industry. And finally, divide the firm’s total sales by its industry’s total revenue.
- Investors or any financial analyst can obtain the market share data from several independent sources, like the regulatory bodies or the trade groups, and sometimes from the firm itself.
Thus, the above steps are used for the calculation of market share for facilitating the decision making process of management regarding position of the business in the sector and what are the future prospects for expansion and improvement.
Let us try to understand the concept with the help of some suitable examples.
JBL has reported its gross revenue of US$ 30 million, and the industry in which JBL operates has total gross revenue of US $ 500 million. You are required to calculate the market share of JBL inc.
Use the below-given data for the calculation of the market share.
- Company’s Total Share: 30
- Industry Sales: 500
Given the company’s sales and market share, we can use the above equation to calculate the company’s market share using the sales or the revenue market share formula.
Calculation of market share can be done as follows:
Market Share = US$ 30 million / US$ 500 million
Market Share will be –
Market Share = 6%
Hence, the market share of the JBL is 6%.
SAB tv operates in many different locations and is currently under review for a hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management. from Star Network. The reason being Star thinks that SAB tv’s market share is increasing. However, the finance research department had a different story to tell. They were of the opening that & pictures are capturing the market share more than SAB tv and & pictures should be the target company to be taken over. The company’s CFO has asked to develop market share for both of these targets, and whoever share percentage is bigger will be targeted.
You are required to calculate yearly revenue for SAB tv, & pictures, and Market sales, along with percentage.
We shall first calculate the total sales of both SAB tv and & pictures and Market sales below:
Now, we can use the above equation to calculate the market Share for SAB TV using the potential market share formula:
Market Share = 3900000 / 39650000
Market Share for Sab TV will be –
Market Share = 9.84%
Calculation of market Share using the potential market share formula for & Pictures can be done as follows:
Market Share = 4030000 / 39650000
Market Share for & Pictures will be –
Market Share = 10.16%
Hence, it appears that the statement made by the finance research department is correct as the market share of & pictures is more than SAB tv. It is advisable to target & pictures for a hostile takeover.
A street analyst is trying to conduct top-down research, and he wants to select the company which has a market share of at least 20% in its industry. Below are some of the top performer’s stocks in their industries:
You must find out the stock that can be shortlisted based on the abovementioned criteria.
Calculation of Market Share for Stock A can be done as follows:
Market Share = 2345678 / 30040078
Market Share for Stock A will be –
Market Share = 7.81
Now, we can calculate market share using the above formula and arrive at the percentage respectively for all the stocks.
From the above table, it is clear that the street analyst will shortlist stocks B and E, and the rest of the stocks will be dropped down at this stage of screening.
You can use this market share calculator.
|Market Share Formula =
Relevance And Uses
The total market share formula, which is big in percentage, is a strong indicator of business success, especially if that market share is trending upwards.
A big market share can boost business and lead to price leadershipPrice LeadershipPrice leadership refers to a situation where the dominant firm sets up the price of goods or services in the market. This happens when there is no difference in the goods or services provided by different firms and customers don’t have a preference and choose the lowest price. in the market, whereas the competitors will be more likely to follow the company in terms of price points that the leading firm shall establish. This situation mostly arises when the firm is the low-cost leader in that industry. However, a firm that offers goods at a lower price point may notPrice PointA price point (PP) is a selling price that a manufacturer or retailer recommends for its product or service to remain competitive in the market while also making a profit. necessarily be the most successful one in finance of that industry. A smaller firm shall reap more profits by taking over a more profitable niche within that market.
The company can use this formula for analysing the performance and track its progress on a year-to-year basis. If the market share grows, it is a sign that it is gaining more customers and proceeding in the right direction.
It can be used to design sales strategies. If market share is low it means that the business needs to invest more in advertising, marketing and product improvement to gain more customers. This will also lead to identifying more investment opportunities, which might be useful for increasing sales.
It can also be used as a benchmark to assess whether to identify areas for improvement or operations that are not adding much value to the business in terms of revenue generation and should be discontinued.
However, if a firm attains quite a larger market share, it can be subject to rules and regulations, including anti-competition laws. Under these regulations, the government might not allow them to complete the proposed mergers because they may have excessive-high market share and, subsequently, a downfall in the competition in that industry. Overall the formula is a good indicator of the company’s position but should be used along with other factors like profitability and market trends to get a comprehensive view of the business performance.
Frequently Asked Questions (FAQs)
That entirely depends on your company’s size, scope, and nature. For example, the typical market penetration rate for consumer items might range between 2% and 6% of TAM. So, if the market penetration is greater than 6%, one is already ahead of the competition.
Leaders may defend market share by assessing their position and acting quickly to address deficiencies. Continuous innovation is the most distinctive approach to maintaining market share. When executives grow complacent about their products or services, it becomes simpler for the competitor to make advances.
A higher market share often converts into better revenues, less effort to sell more, and a high barrier to entry for new rivals. A larger market share indicates that if the market grows, the leader will benefit more than the rest.
This article is a guide to Market Share Formula. We discuss calculating market share using its formula, practical examples, and a downloadable excel template. You can learn more about financial analysis from the following articles –