What is Market Share and How to Calculate It
As an entrepreneur, you probably have heard terms like “market” and “market share”. What exactly do they mean? What is market share and why is it important? And the key question: do you need this information for your company? Of course! The good news is both concepts are incredibly simple to understand. And we are here to help.
What is “Market”?
Let’s start with the concept of “market”. When we use this word in business, we need to think beyond the typical physical place where we buy and sell goods. When marketing strategists use the word “market,” they refer to groups, organizations or individuals, divided in of four types:
- Consumer market
- Business to business market (industrial)
- Institutional market
- Reseller market
These 4 categories can also be divided into subgroups, depending on their size or geographic area (local, regional, national or international markets).
If you have a small business, it is important that you take into account the volume of your sales and your ability to grow in your market. You must ask yourself two powerful and strategic questions
- What were your sales last year?
- How do those sales compare with the average sales in your industry?
These two questions form the basis of “market share”. Knowing that data is extremely important for any business, as it will help you know exactly the current size of your company, and therefore you can plan a strategy to grow it.
What is Market Share?
Market share refers to the size of the market that a company has in a given segment. It is an index of competitiveness showing how well your business is performing in the market in relation to your competitors. It helps you determine the strengths and weaknesses of your business, as well as see if your market is growing or not. It’s quite simple to calculate and use. Let’s see how to do this.
How to Calculate Your Market Share – Market Share Formula
Do you remember the two powerful questions in the first section? Make sure you have a pen and a piece of paper handy because it’s time to start using those questions for your own business.
As we mentioned, knowing your company’s participation in the market will help you develop growth strategies. You can start by using two different formulas to calculate your market share. Here goes the first one:
What is an example of a market share? Let’s say that Joe’s Little Italy Pizza sells a total of 2,000 pizzas per month, and the sales volume of all pizza restaurants in the area (the competitors) is 10,000 pizzas per month. This means that Joe’s Little Italy Pizza has a volume market share of 20%.
Now, this is the second formula you need:
As we saw in the previous example, Joe’s Little Italy Pizza sells a total of 2,000 pizzas per month, with an average retail price of $12.99 per client, and therefore a total monthly sales of $25,980. Assuming that the sales volume of all competitors in the area is 10,000 pizzas per month, with an average sales price of $ 1.99 dollars, this means that Joe’s Little Italy Pizza has a sales market share of 22 %.
These formulas can often give us contradictory results, because a unit can have a high monetary value or price, and low quantities of units sold. This will result in a high revenue market share, but a low sales market share.
Are you ready to calculate your market share after knowing these two formulas?
Why Is It Important to Calculate Your Market Share?
Simply put, because your business can’t fall behind. Imagine the market share as a cake. Knowing the size of the cake will let you know the size of the slice you can eat, if it is larger or smaller than that of the other guests, if you can ask for a little more and other valuable information.
Here are six reasons that show why it is important that as an entrepreneur to be aware of your market share:
- Knowing your market share will let you know if you are growing efficiently.
- It allows you to know how your company is positioned compared to your competitors.
- If your business increases its market share, it will be more attractive to new customers and potential new partners.
- A growing market share allows you to plan new strategies and anticipate new scenarios that are conducive to your business, as well as consider options such as a business loan that will make your growth more efficient.
- Understanding your market share allows you to objectively measure pricing strategies and consumer perception towards your products, services, and promotions.
- You will be able to identify key trends in consumer behavior, know their potential in the market and the areas in which they have not been served yet.
Can you see? These reasons are simple but powerful. Knowing your market share allows you to know and quantify the impact of your past strategies on your current results, as well as evaluating your performance. It also reveals how big or small your company, brand, service or product is compared to your market. Knowing all this, you will be better positioned to answer some questions: do you want your company to grow? In how long? What decisions will you have to make? And the most important question of all: how far do you want to go?
Now you know the importance of calculating your market share and the multiple opportunities that you can access armed with this information. It can help you grow your business! Knowing your market share will allow you to analyze your company’s present and predict its future. This way you can plan properly and seek advice and financing options to grow your business.
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