One of the best ways to learn about market shares is by taking online finance courses. Companies and businesses sell their products and services to customers, with the ultimate bottom-line being profits. How does a company or business ensure increased profitability? One of the elements used to track revenues and profits is market share. In very simple terms, ‘market share’ is the portion which a particular company’s products or services occupies as compared to the total market.
For example, take cheese; there are fifty brands of cheese available in the market and company X owns twenty of these brands. The market share of X is 20/50, which is 40%. Another way to calculate market share is to divide the revenue X earns by selling cheese, against the total revenues generated by the cheese market. If the total revenue generated in the market is $1,000, and X’s share of revenue is $400, then the market share of revenue is again 40%.
Calculating market share
Market share can be calculated using two variables – number of units sold or revenue earned per unit. The formulae used are as below:
- Number of units sold (X)/Total number of units sold in the full market (Y)
- Revenue earned on X units (A)/Total revenue generated on Y units (B)
Importance of market share
As explained above, increased revenues mean increased profits. The revenues earned by a company or business can be increased by increasing sales, i.e. getting more consumers to buy that company’s products or services. Knowing one’s market share enables the company to devise strategies to increase the same and thereby earn more profits. Here, it is important to remember that revenues can be increased not only by more sales, but also by decreasing the cost per unit of producing the product or service. A higher cost of production could eat into the share of revenue that a company earns and vice versa.
An assumption made in the example quoted in the introduction is that all units of the product or service are sold at the same price. In reality, different companies will price their products and services at different rates, and the market share calculated on the basis of revenue earned may not match up when compared with the number of units sold. For example, company A sells 20 units of cheese at a price of $5 per unit and its revenue is $100. Company B sells 30 units of cheese at a price of $3 per unit, earning revenues of $90. If the total revenue generated in the market of cheese is $500, the A’s revenue market share is 100/500 or 20%, and B’s revenue share is 90/500 or 18%.
If we were to calculate market share on the basis of number of units sold, then continuing with the same example, let’s assume that 300 units of cheese were totally sold in the market. A’s unit market share is 20/300 or 6.67% and B’s unit market share will be 30/300 or 10%. As you can see, the price differential accounts for the difference in unit vs. revenue market share.
Factors affecting market share
In a continuously changing environment, a company’s ability to adapt and change in a proactive or reactive manner will reflect in the market share that it earns or loses. The factors which affect market share can be summarized as:
- Consumer preferences, attitudes and choices
- Buying and spending trends
- Production and other costs
- Governmental, regulatory and taxation policies.
To increase market share, companies need to understand and predict consumer behavior and factor costs and policies which impact their products and services. Providing increased value to consumers at attractive prices is the key to increasing market share; to learn more about how to further increase your company's market share, you may want to enroll in some online classes in finance.