Understanding Market Share

By D.A. Barber , last updated September 2, 2011

When a company touts how much of a market share it controls with one of their particular products, the company is talking about the percent of sales it has attained compared to the total sales of all similar products by its competitors that over a specific period of time. For example, Ford Motor Company had 13.6 percent of the U.S. retail auto market share for the first quarter of 2011, according to Bloomberg news reports. Ford’s sales performance relative to its competitors is measured by the percentage of the total U.S. auto market it was able to capture, so Ford’s market share was 13.6 percent.

Importance of Market Share

In a competitive economy, companies are always looking to maintain or even expand their piece of the marketplace pie. As the market grows for a type of product, the company that maintains its market share is also increasing revenues at the same rate as the total market is growing. If that company is also experiencing an increase in their market share as the market grows, its revenues and profitability will grow faster than its competitors.

Investors look at whether a company’s market share increase or decrease as a sign of that company's long-term competitiveness. The advantage of using market share as a measure of company performance is that market share is less dependent on such variables as changes in tax policy or the economy. In some cases, a company with a market share that falls below a certain level may no longer be viable. Company marketing departments like to translate sales targets into market share to demonstrate their forecasts can be achieved by expanding within the current market or by snagging more market share from competitors.

Maintaining Market Share

Companies closely monitor their own market share for signs of competitive changes and will frequently make strategic adjustments. In fact, companies can become quite aggressive in defending and maintaining their market share. Companies protecting, or striving to increase, their market share will use one or a combination of standard techniques. One strategy is to improve their product quality so that it is better than their competitors. Another trick is to decrease the consumer price or offer special discount incentives. Of course this tactic can backfire if the company’s competitors decide to match the price cuts. Companies will also try new methods of distribution or increase the intensity of their current distribution to get their products in more retail locations. Finally, increasing advertising and promotion budgets can also have an impact on a company’s market share.

Benefits of Increased Market Share

Maintaining a dominant market share is often associated with profitability, but it also has some indirect perks: High volume sales can mean a long-term cost advantage. Increased market share also means better bargaining power since a market leader in a given industry gains clout it can use in negotiations with suppliers. Finally, if a company is not growing due to an overall stagnant industry, the firm still can grow its sales by increasing its market share.

Downside of Increased Market Share

An increase in market share is not always a good thing since a company may not be able to meet a sudden demand without massive investments in equipment and employees. In some cases it can be to a company's advantage to decrease market share if the lower market share can improve profitability due to lower costs. This might happen if a firm identifies a certain customer base that’s become unprofitable and drops those customers.

If the only way to increase market share is by increasing promotional expenditures or by decreasing prices, this too can cut into profits. In fact, there is always a chance of triggering a price war with competitors that can further cut into profits. Increasing market share may also open a company to anti-trust laws, or subject the company to market share liability if it produces, for example, hazardous products sold into the United States.

Finding Market Share Info

To calculate the market share of a particular company yourself, you would have to look at every single company in a specific industry and determine how much business in that industry the company you are checking actually controls. This is done by taking your company's sales over a specific time period and dividing it by the total sales of the entire industry. Luckily, individual market share information is usually available from the company’s website or from other internet sources such as trade groups and government regulatory agencies. One particularly good source of global company rankings to start with is the Forbes Global High Performers list (http://www.forbes.com/lists/global-high-performers-full-list.html).

Related Articles
Understanding the basics of market futures begins with understanding what futures themselves are and how the market works. Even if you are familiar with more traditional ...
The swap market can be complicated, but it is possible to understand it. This article will attempt to break down what the swap market actually is and how it works ...
For most, understanding the securities market is a labor of love, accomplished over time, with much discipline, and persistent studying. While it can look fairly ...
About -  Privacy -  AskEraser  -  Careers -  Ask Blog -  Q&A -  Mobile -  Help -  Feedback © 2014 Ask.com