Is Your Company or Product Leading or Trailing the Competition?
The market share analysis is another tool used as part of the marketing annual plan control and closely related to the sales analysis tool. Market share indicates how your company is doing in terms of unit or revenue sales compared to your competition. However, market share is perhaps the most overused and misused marketing metric.
Experienced marketers downplay the role of market share or ignore it outright as their processes and ways of measuring success have evolved, making market share analysis irrelevant. However, if the metric is used correctly, in context, and for the right purpose — as with all metrics — then market share is a useful tool for short-term use.
Overall Market Share Analysis
There are several ways of calculating market share. The most common metric is the overall (or total) market share analysis. The overall market share is the percentage of a market in terms of either unit sales or sales revenue. In other words, it’s the company’s total units sold or revenue generated in comparison to the market’s competitors.
Understanding the total market share helps marketing managers determine their total market growth or decline and helps them gain insights into trends for how customers make competitor selections.
Organic sales growth (or the total market growth) costs a company less and is more profitable than the firm seeking to achieve growth by capturing competitor shares. However, losses in market share may signal long-term problems that require the firm to make strategic adjustments to its marketing plan. A company with a market share below a predetermined level may not be profitable, thus not a viable business. Also, firms can use shifts in their product market shares as leading indicators of future opportunities or potential competitive challenges. If a product’s market share dips below a specified level, marketers need to look at various scenarios to determine the cause for a drop in sales. Conversely, suppose sales surge, and the firm gains market share. In that case, this could indicate a problem with the competition or other potential scenarios that require closer analysis.
How Overall Market Share is Calculated
Calculating market share is a relatively simple process. However, gathering competitive data may prove arduous without the proper primary or third-party research data. Assuming that you have this data, market share is calculated in two ways, as mentioned earlier: unit sales and sales revenue.
Unit Market Share is the units sold by a firm as a percentage of total market sales. The formula for unit market share is:
Revenue Market Share reflects the price of sold goods. The formula for calculating revenue market share is:
Relative Market Share Analysis — A Better Metric
Unlike total market share, which examines the whole market, relative market share analysis measures a firm’s market share related to its largest market competitor. Tracking relative market share over time gives you a benchmark and better understanding of what’s happening between you and your largest competitor. Relative market share allows marketing managers to compare relative market positions across different product markets.
A company or product tied for the lead with its largest competitor in the same market has a relative market share of 100-percent. Anything more than 100-percent indicates a market leader, and less than 100-percent shows the firm behind the market leader. The relative market share can help a company better understand its position or product position in the marketplace with more meaning than the total market share.
Relative market share’s calculation is similar to total market share. Calculated the metric by either the brand’s product units sold or revenue generated. The formula for the relative market share calculation is:
Market Share Analysis Challenges and Assumptions
While market share, precisely relative market share, is an excellent metric to measure your firm’s or brand’s leadership or lack of in a given market against competitors. It is not without challenges. Conclusions from market share analysis come with several assumptions.
First, the assumption that external forces affect all companies in the same manner is often without merit. For example, the U.S surgeon general’s notice the harmful effects smoking has on the body depressed total cigarette sales but did not affect all companies equally.
The assumption that a firm’s performance should be judged against all firms’ average performance is not always correct. The best way to evaluate a company’s performance is against that of its closest competitor.
The assumption that if a new firm enters the industry, then all existing firm’s market share may drop. A decline in market share does not necessarily mean that the company is performing worse than other companies. Share loss depends on what degree the new firm enters the company’s specific markets.
The assumption that a market share decline is deliberately engineered to improve profits. For example, marketing managers may drop unprofitable customers or products to reduce costs by driving up profits.
The final assumption is that market share can fluctuate for many minor reasons. For example, market share is affected by changes in promotional strategies because a massive promotional sale on a given date affects market share. It may also be affected by social and cultural phenomena like a sales spike for Ocean Spray Cran-Raspberry drink when a video went viral, showcasing a man skateboarding and consuming the beverage.
Market share is undoubtedly a critical metric to measure. However, marketing managers must throw caution to the wind when using the metric. In other words, marketing managers must use the metric correctly, in context, and for the right reason for it to be a useful analytical tool to guide marketing performance. While overall market share provides a high-level view of where the organization or organization’s product falls compared to the competition in the same market, relative market share is a better indicator of whether a firm or product is leading or lagging behind its closest competitor.