Market share is how much of the market a business, product or brand has relative to the total market. Market share is expressed in terms of percentage and is calculated by dividing either the total sales or volume of a business, product or brand by the combined total sales or volume of all its competitors. When developing marketing strategies, forecasts and product development, many underlying factors must be examined to understand how market share is influenced.
Measuring Market Share
An analysis can only be as good as a clear definition of the market being analyzed and the quality of the data available. For large markets, market research data can be purchased from marketing research firms. Other sources for data are industry and trade associations.
The marketing mix is made up of “The 4 P's”: product, price, promotion and place (distribution). “Product” involves examining the product design and ranking its characteristics in order of importance; rankings should rely on product testing or customer feedback as well as an identification of the product’s competitive advantages. “Price” considerations include the overall pricing strategy, which includes product life cycle and pricing method. “Promotion” examines the types of advertising, direct marketing and consumer promotions (such as coupons) for their cost and effectiveness. “Place” refers to the distribution plan, or the channels that the product goes through in reaching the consumer, including evaluating customer service needs, inventory management shipping and tracking.
Market concentration is an important factor when conducting market share analysis. Market concentration is proportion between the total volume of the market and the volume owned by the leading companies, products or brands. The market is said to be “highly concentrated” when the top three to five companies own a large part of the total market. If the market leaders own a small part of the market and there are a lot of competitors, the market is said to be “fragmented.” Examining market concentration helps to identify a product’s niche.
Market penetration is a term referring to the percentage of potential customers within the service area of a company that could reasonably be expected to buy the company’s product or service. It is based on reasonable market assumptions that require comprehensive knowledge of the market. Important factors in market penetration are potential product demand based on the assessment of an unmet consumer need or untapped market segment; the assessment usually includes a projection of how long it would take for the market niche to be developed. Overly optimistic market penetration assessments can produce unrealistic growth potential projections.
Lisa Dorward was a corporate financial executive and business consultant for more than 15 years before becoming a writer in 2003. She has B.A. degrees in both history and creative writing and earned her M.F.A. in creative writing in 2008, specializing in novel-length historical fiction.