Market Share Definition, Importance, Advantages, Disadvantages, Example, Types, Formula & Overview

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Definition: Market Share

Market share of a company is the proportion share of total market volume that belongs to the company. Market share is usually in terms of revenue, customers or sales. Market Share is the percentage of the entire market accounted for by a company or brand vis-à-vis its competitors. The market share can be defined in terms of dollar share or unit share.

The term revenue market share (RMS) is the market share the company has acquired as a percentage of total sales for the industry. RMS is also sometimes referred as dollar market share. Customer market share (CMS) is the percentage of customers in the market which a company has compared to its competitors. The volume market share can be calculated and compared on the basis of volumes of goods sold. Relative market share compares a company’s position compared to a competitor or the leading company.

Importance of Market Share

Market share is the indicator of a brand’s performance in the market relative to its competitor’s performance. There is no better indicator of a firm’s position in the market than the revenue share. If affirm manages to increase its revenue which is the top line, it not only increases its own sales but also gains a significant market share. Revenue alone cannot justify a firm’s grip in the market because at times, revenue may be higher the market share may be low. This means the product is being liked by customers but less so in comparison to its existing customers. It further means that the brand is letting go of a considerable customer base which is loyal to other brands. The need for firms is to increase revenue and also keep an eye over its market share which is the real indicator of a firm’s growth and market position. Companies also use buying market share strategy by reducing prices to increase its business.

Market Share

Formula for Market Share

Mathematically, market share can be calculated as below:

Market share (%) = (Total Sales of Company / Total Sales of the Market)

Usually, market shares of all companies are represented using a pie-chart, which shows the share in the entire market or industry.

Types of Market Share

The most prominent types of market share are:

1. Revenue market share (RMS): The share in the market is calculated on the basis of revenues generated as compared to competitors.

2. Customer market share (CMS): The ratio of the total number of customers as compared to total number of customers in the sector or industry.

3. Volume market share: The ratio of the units sold by one company as compared to all the units sold across the industry by all companies put together.

Advantages of Market Share

There are several advantages of market share:

1. Real indicator a firm’s growth.

2. Market share is the real indicator of a firm’s market position.

3. Gives an idea about the competitive rivalry.

4. Indicator of the top line for a company.

Disadvantages of Market Share

Certain drawbacks of market share are:

1. Market share is an absolute figure. So, looking at one year’s data may be deceptive as we can know the current position of the firm but can get no clue about its growth or decline.

2. Only when we see past years’ data and calculate the change in market share, we can trace its real performance.

Examples of Market Share

Consider the different example of market share:

1. Revenue Market Share (RMS): If a company X selling toothbrush has sales of $200,000 and if the entire market for toothbrush is $500,000, then the market share of X is:

$200,000 / $500,000 = 40% revenue market share

2. Volume Market Share: For example, if a company Y selling two wheelers has sold 500 two wheelers and the total number of two wheelers sold is 4000 then the market share of Y is:

500 / 4000 = 12.5% market share

3. Customer Market Share (CMS): If a company Z has 250,000 customers and all the customers in the particular industry are 1,000,000, then market share of Z is:

250,000 / 1,000,000 = 25% customer market share

Hence, this concludes the definition of Market Share along with its overview.

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