Firms are always concerned with the size of the potential market for their products or services and the proportion of that market they actually reach—often referred to as a company's market share. Market share is the percentage of the total market (or industry) sales made by one firm. As a formula, Market Share = Firm's Sales ÷ Total Market Sales. Share can be reflected as either percentage of sales dollars, percentage of units sold or percentage of customers. Percentage of sales dollars is the most common reference.
Market share is one of the most commonly quoted measures of success in any industry. To correctly determine market share, one must clearly define the market. Having a small share of a large market can be as profitable as a large share of a small market. A producer of leather horse saddles must determine if his market is made up of saddle sales, equestrian sales, or all leather goods sales. Obviously, his market share in the saddle industry is much larger than his share in the leather goods market.
There are two sources for measuring market share: competitors and consumers. Surveying competitors gives a more accurate and reliable picture of market share. It is possible to interview 100 percent of competitors, but not all consumers. To get a reliable figure from consumers, a large number of people would have to be interviewed. For many industries, sales and market share figures may already be compiled by government agencies, trade associations, or private research firms.
Market share defines the roles played by various firms in an industry. The firm with the largest market share is the market leader. The market leader usually has the highest marketing expenditures, distribution, price changes, and new product innovations. Market challengers are the firms working to increase their market share. Firms in an industry that are content with their share of the market or doing little to increase sales are considered the market followers. The market niche brand is the player that targets its business toward serving smaller, overlooked segments that are often ignored by the larger players. The niche marketer can be very profitable, opting for high margins over higher volume.
The leader must constantly monitor the market because the challenger is constantly trying to take away market share. The market leader has three options to keep its market position: expand the total market, protect market share, or expand market share. Creating more usage, new uses, or users expands markets. Leaders can protect market share by monitoring their position and rushing to remedy any weaknesses. Continuous innovation is the best way to protect market share. When leaders become complacent with their products or services, it becomes easier for the challenger to make progress. In large markets, small increases in market share can translate into very large sales increases; a one-point gain in market share can be worth hundreds of millions of dollars.
The market challenger must attempt to gain market share from the leader. The challenger must have some sustainable competitive advantage to attack the leader's market share. The challenger can attack other competitors through a direct attack by altering price, promotion, or distribution, or indirectly by diversifying or catering to underserved segments. Followers must keep quality high and prices low to maintain their positions. As Armstrong and Kolter point out in Principles of Marketing (1999), the market follower must "find the right balance between following closely enough to win customers from the market leader but … at enough of a distance to avoid retaliation."
Niche marketers have many options available to them. The company must find a niche that is safe and profitable. It must be large enough to sustain growth but small enough that it does not look attractive to the market's larger players. Targeting multiple niches is an option that offers the niche marketer a higher chance of survival because the firm is not dependent on one segment.
Across segments, attempts to affect market share take place across the four "P's" of the marketing mix: product, price, place, and promotion. However, there are instances in which increasing market share is not necessarily desirable. The costs to increase production, or improve the product, may not be covered by the incremental profits.
Market share is easily understood by most managers, employees, and shareholders; therefore, it is often used as a primary measure of success. It is critical to understand market share, how it is used to identify market participants, and how the different participants use it to determine their market strategy.
SEE ALSO: Generic Competitive Strategies
Revised by Deborah Hausler
Armstrong, Gary and Philip Kotler. Principles of Marketing. 8th ed. Upper Saddle River, NJ: Prentice Hall, 1999.
Davenport, Todd. "Focusing on Share? Wise Up, Analysts Say." American Banker (1 November 2004): 9.
"Marketing: Market Share." QuickMBA.com. < http://www.quickmba.com/marketing/market-share/ >.