Running a business requires a comprehensive understanding of the intricacies of its economic dynamics. One crucial aspect to grasp is the concept of market share. Market share is a fundamental element in a company’s economic framework and a key consideration for investors. The following provides a comprehensive explanation of market share, its types, and formulas.
What is Market Share?
Market share can be defined as the measure of a company’s power in relation to its competitors within a particular market. It represents the distribution of power among market participants.
For example, if a company controls 46% of the market, while hundreds or even thousands of other competing companies in the same field control the remaining 54%, this division represents market share.
Another straightforward example would be in a city where Company A, Company B, and Company C all sell children’s clothing. If Company A sells 170 pieces, Company B sells 30 pieces, and Company C sells 100 pieces out of a total of 300 children’s clothes sold in the city in 2022, it can be concluded that Company A controls more than 50% of the market.
Also read: Gross Merchandise Value (GMV): Definition and How to Calculate It
Functions of Market Share
What is market share? (source: freepik)
Market share serves several important functions for businesses. These functions include:
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Comparison with competitors
Market share provides a basis for comparing a company’s performance with its competitors in the same industry. Companies with a larger market share typically generate higher revenues, making this comparative data crucial for investors.
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Data for evaluation
Market share data is valuable for evaluating a company’s position and developing future business strategies. It helps identify competitors’ advantages in the eyes of customers, understand why their products sell better, and determine the actions required to outperform them.
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Benchmark of success
Market share serves as a benchmark for assessing the success of a business or company. Companies that dominate the market and outperform their competitors are considered successful. Even if a company’s market share seems relatively small, it can still be significant when considering the overall market landscape.
Also read: What is Return On Investment (ROI), and How to Calculate It
Types of Market Share
Market share can be categorized into three types based on market dynamics:
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Mutual fund share
The shares that investors own determine this type of market share. For example, if you own 5% shares in 10 sock companies in City D, and these 10 sock companies collectively dominate 80% of the market, your mutual fund share would be 4%.
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Common market share
This type of market share involves competition among all businesses in the same industry within a specific region. Companies must develop effective business strategies to dominate this common market.
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Preferred market share
This type of market share is acquired through market mergers or acquisitions. When a merger occurs, the involved companies gain additional market share in the targeted area. For instance, if Company C controls 20% of the market and merges with Company F, which controls 14% of the market, the combined entity would have a total market share of 34%.
Also read: What is Profit: The Types and the Elements
How to Calculate Market Share
Calculating market share is relatively straightforward. The following formula can be applied to calculate a company’s market share:
MARKET SHARE = (Company revenue/Industry’s total revenue) X 100%
For example, if Company A generated IDR 40,000,000 in revenue in 2022, and the total revenue for the entire industry in the same year was IDR 400,000,000, the market share calculation would be as follows:
MARKET SHARE =
= (Rp40.000.000/Rp400.000.000) X 100%
= 10%
This calculation reveals that Company A controls 10% of the market share in that industry.
Also read: Types of Assets and The Examples
How to Increase Company’s Market Share
What is market share? (source: freepik)
Increasing market share is a crucial goal for companies to establish themselves as successful players in the market. Here are several strategies to achieve this:
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Observe, imitate, and modify
Learn from market leaders by observing their business systems and strategies. Imitate their approaches, but also modify them to suit your company’s unique characteristics, enabling you to surpass the market leader eventually.
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Set a pricing strategy
Analyze your company’s expenses and identify areas for optimization. This analysis can help you reduce prices and effectively compete with other market players.
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Diversify products
Differentiate your company by creating diverse products or variations of existing products. By producing similar goods under different brands, you can attract customer interest and generate positive word-of-mouth.
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Enhance brand awareness
Increase your company’s brand awareness by building strong interactions with potential customers. Customers who recognize and trust your brand are more likely to purchase your products, ultimately contributing to a larger market share.
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Build customer loyalty
Prioritize customer satisfaction and provide excellent service. By fostering strong relationships with customers, you can increase loyalty and encourage them to remain loyal to your brand, as well as recommend your products to others.
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Make breakthroughs
Conduct research and introduce innovative products or services that address the needs of your current or potential customers. By offering unique solutions, you can attract attention and gain a competitive edge in the market.
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Target competitors with the largest market share
Direct your efforts toward the top competitor in your market. By considering them your biggest rival, you can motivate your company to strive for excellence and increase its market share.
While market share is an important measure of success, it’s crucial to understand that there are other benchmarks to evaluate business performance.
