A company’s market share is the amount of money in sales the company earns in the industry as compared to how much the entire market has earned as a whole. One way to measure a company’s market share is to divide the company’s sales revenue by the amount that was earned by the entire industry.
Company X sold $1,000,000 in sales of handbags last year.
The entire handbag industry sold $5,000,000,000 for that same time period.
1,000,000 / 5,000,000,000 x 100 = 0.02% market share.
Companies concern themselves with their market share when they hope to bring new investors into their companies. Those who are searching for a new company in which to invest will want to choose companies that have a market share that is currently growing. This means that they are increasing their sales faster than the rest of the market and usually becoming more and more profitable as their market shares go up.
Another time for a company to concern itself with its market share is when they are looking into how much revenue they are earning relative to their competitors. As the market share goes up, companies can convince their management to increase their output and advertising efforts in order to continue increasing their profitability. If the company cannot demonstrate to its board of directors that their current strategies are having a positive effect with the increased market share they are commanding, they will have a more difficult time continuing with their present business practices.
A third time market share is critical is when you are in a “land grab” market, usually where the market is completely new and whoever gains the largest market share will command the largest profits in the future. Social networks are the newest examples of a land grab market.
Although the market share can show investors or boards of director that the company’s sales are decreasing or increasing, it does not always translate into decreasing or increasing profits. An example of this is the Apple iPhone. The iPhone has only 4.2% market share in the mobile devices market but it commands a massive 51% of the profits in the industry (AppleInsider.)
Market share is just a statistic as as the saying goes, ” there are three types of lies: lies, damned lies, and statistics.” Market share can be used to tell almost any type of story. The real usefulness of market share comes into play when you can use it to draw conclusions about past activities and future direction. When examining your market share, don’t get caught up in the number, but rather look at the number as a reflection of what you’re doing in your business and marketing.