Market size variance measures the effects that market size fluctuations have on a company's profits.
The size of a market for a specific product can vary due to many circumstances. Products that consumers had to have one year can go ignored the next, gathering dust on store shelves. Companies need to understand how these fluctuations in market size affect their potential profits. The market size variance measures how the changes in market size can alter a company's expected income.
Market Size: Actual vs. Budgeted
The market size of an industry is simply the total amount of units sold across all companies in that industry. The actual market size is the total number of units sold to customers. The budgeted market size is the number of units the companies had planned to sell to customers. For example, if the video game industry had planned to sell 1 million consoles in a year but had actually sold 1.2 million, the budgeted market size for the video game industry would be 1 million consoles, while the actual market size would be 1.2 million.
Budgeted Market Share
With the exception of monopolies, companies that participate in a specific industry do not control 100 percent of the sales in their markets. A company's budgeted market share is the share of the market the company expects to receive in sales. For instance, if the video game industry had planned to sell 1 million consoles in one year, and Generic Games expected to sell 100,000 units of its SuperGeneric console that year, the budgeted market share for Generic Games would be 10 percent (100,000/1,000,000 = 0.1 = 10 percent).
Calculate Market Size Variance
The formula for market size variance (MSZV) looks like this:
MSZV = P x (MSZA-MSZB) x MSHB
- P = the weighted price average of each product
- MSZA = actual market size
- MSZB = budgeted market size
- MSHB = budgeted market share
In this example, Generic Games sells its SuperGeneric console for $300. The industry's actual market size is 1.2 million units, and its budgeted market size is 1 million units. Generic's budgeted market share is 10 percent.
MSZV = 300 x (1.2M - 1M) x 0.1
= 300 X 200,000 x 0.1
= 300 x 20,000 = $6,000,000
Uses for Market Size Variance
The market size variance calculation can help businesses assess how changes in the market size can affect their revenue projections. In this example, an increase of 200,000 units over the projected industry total contributed to an increase of 20,000 units sold over Generic Games' internal projections, which led to an additional $6 million over expected sales.