Defines what is market share and why it is important. Outlines how to calculate it, including absolute and relative share.
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In order to be successful with a business, you need your place in the market. Especially in today’s globalized world, it is important to assert oneself there and to act profitably.
CONTENTS
- What is it?
- How important is it?
- What types do you need to know?
- How can you calculate it?
- What do you understand by a dominant position?
- How can you use it for your marketing planning?
- In a nutshell: frequently asked questions
- Conclusion
What is market share?
The term defines a key figure that is used to determine what proportion of both sales and sales you can book on the entire market. The share is measured as a percentage of the total value or your output of a market as a currency indicator. The result is correct according to the sales volume or the revenue at a very specific point in time.
How important is it?
For you as an entrepreneur, it represents a measure of the importance you have as a provider of a product or service in a certain market segment. You can also classify the market share as a quantity, which indicates how things are going with a possible long-term success of your company. It shows you how strong you are with your company compared to your competitors. The bigger your share, the better it is for you. The share is to be determined both as a key figure for the sales market and for the procurement market and you can determine it in terms of quantity or value.
A question of positioning
The relevant market is also a question of positioning. For example: Bicycle retailers who concentrate on the target group of sporty racing cyclists serve a smaller market than generalists, where everything from children’s bikes to e-bikes for pensioners is available. Our positioning tool helps you to find your relevant market and its positioning.
What is the turnover of the competitors?
Finding this number is more difficult. Because no competitor voluntarily reveals its business figures. The principle of qualitative estimation also applies here. Entrepreneurs could estimate the turnover of a restaurant based on the service tables, the number of service staff or the restaurant area. Typical sales figures per table, per employee or per square meter are used to determine possible sales figures.
Deriving strategies
Basically there are different strategies that entrepreneurs derive from this key figure
| strategy | Explanation | example |
| Market penetration strategy | Increase share in the long term with a given product in a given market and establish yourself on the market. | Foundation of a fashion boutique |
| Market development | Open up new target markets with an existing product | Subsidization of the boutique concept |
| Product development | To compete in a given market with new products | Range expansion to include organic women’s outerwear |
| Diversification | Offering new products in a new market. | The fashion boutique now also sells shoes |
There are also different types of growth:
- Self-sufficient growth: positive sales and earnings increase equity and the ability to invest in growth.
- Growth through company acquisition : A successful company buys a competitor and thus secures its position in an existing or new market.
- Growth through franchising: The entrepreneur makes his concept franchise-ready. How to become a franchisor.
What types do you need to know?
You have to know and differentiate between the types of relative and absolute market share. In the case of absolute market share, you are talking about the share of turnover or sales of your product or service in the respective overall market. As an entrepreneur, you consider the relative market share of your own turnover or your sales compared to your strongest competitor.
NOTE: This comparison is limited to a specific performance period and to the same market.
How to calculate market share
One of your ongoing tasks as an entrepreneur is to keep an eye on the market and react to changes. To do this, you have to calculate your market share, among other things.
Calculation of absolute market share
When calculating the absolute percentage, you have to take the total market volume as a basis. You work with a formula that looks like this.
Absolute market share = own sales / sales: total sales / total sales x 100
To illustrate this exactly, let’s assume as an example that you sell a very specific piece of software. Last year you made a turnover of $20 million with it. The total volume on the market for this product is $400 million. This means that your calculation looks like this.
Absolute market share in percent = $20 million : $400 million x 100 = 5%
However, relying on this metric for absolute market share alone is not enough for you. It is the only indicator that is not meaningful enough. Especially not if you are active in a polypolistic market. This is a market form in which there are many providers of this software and all of them have only a small market share. This means that in this case you could already be the market leader with the 5% from the example if the others are all below this value. For you, this means that you definitely have to calculate the relative market share as well.
Calculation of relative market share
With the relative market share you do not compare the turnover or sales of your company with the entire market. Your biggest competitor provides you with the benchmark. If you are possibly the market leader, then you need to look at the best competitor when calculating the relative percentage. Again, you work with a formula that looks like this.
Relative market share = own sales / sales: sales / sales of strongest competition x 100
As an example, let’s assume that your market share is the same as that of your competitor. That would mean that the relative market share is 100%. But if this value is below 100% for you, then your competitor is better than you. If it is above this value, then you are the market leader. Let’s stay with the example from above with the special software and insert the values into the formula under the view that your competitor makes twice as much sales, i.e. 40 million.
Relative market share in% = $20 million : $40 million = 50%
What is a dominant position?
In addition to its meaning for you as a key figure, the market share is also a legal term from antitrust law. The market share serves as an important factor and indicator for an existing market power. If the market position of a company is considered in relation to its competitors, then the market share is used as an important criterion. There is always the suspicion that a percentage of at least 40 percent is in a dominant position. This assumption can of course also be refuted at any time. From a share of 50 percent, there is no longer any suspicion, but is regarded as a clear dominant position. Such companies are under special observation and certain types of behavior are prohibited by these companies.
How to use market share for your marketing planning
This also an important parameter for your strategic marketing planning. In order to allow turnover or sales to grow optimally, you first have to exploit the market potential. This can be the maintenance of your percentage, but also the expansion of it. If you get stuck here and you can no longer achieve a certain percentage of the market, you need a new strategic alignment of your marketing planning.
- Create sales potential in new markets. This applies to regional, national and international markets.
- Developing specific offers for new target groups, for example by varying the product group
- Look for new uses for your products or services and enter additional markets
Of course, you can also secure or expand your percentage of the market if you bring completely new products to the market.
- Bringing innovative products to market that were previously not on offer.
- Develop new products that are better than previous products.
- Expansion of your range of products or services
FAQ
What is the absolute market share?
It defines an absolute turnover or sales of a company compared to the total market volume. The absolute market share can be measured in units of value or quantity.
How do you calculate market share?
If a company that sells software has an annual turnover of 20 million euros and the total market volume is 400 million euros, then the market share of this company is 5%.
When do we speak of a market leader?
A market leader is a company that has the largest market share in terms of turnover or sales in the relevant market compared with all other competitors. If this also applies globally, then we speak of the world market leader.
Summary
Let’s summarize the whole thing again briefly at the end. This business key figure shows how large a company’s share of the overall market is. One can differentiate between relative and absolute market share. The latter compares its own values with the entire market. With the relative, however, a company puts its sales or turnover in relation to the strongest competitor in the same industry.
The calculation enables entrepreneurs to assess the company’s current success and future competitive prospects. The key figure is closely related to the market and competition analysis, which should also be anchored in the business plan. The calculation is quite simple using a formula once the data on the market volume is available. In addition, estimating market growth and market potential are also important for a successful start-up.
