A company's market share is its sales measured as a percentage of an industry's total revenues. You can determine a company's market share by dividing its total sales or revenues by the industry's total sales over a fiscal period. Use this measure to get a general idea of the size of a company relative to the industry.
Investors look at changes in market share as a possible sign ofthe relative competitiveness of a company's products or services. As the market of a productorservice within an industry expands, a company that is maintaining its market share is growing itsrevenueat the same rate as the total market. A company that is growing its market share will be growing its revenues faster than its competitors.
Key Takeaways
- Market share is the proportion of activity of a specific company compared to the rest of the industry.
- Market share is usually calculated using total revenue, though non-financial metrics like units sold or the number of customers can also be used.
- Market share is calculated by dividing the company's total by the industry-wide total for any given data set.
- Market share is useful when comparing companies across the same industry.
- Companies with higher market share are often less risky investments with less upside than companies with lower market share.
How to Calculate a Company's Market Share
A company's market share is often quoted as a percentage of industry-wide sales. However, there are other ways to calculate a company's market share. For example, instead of comparing total dollar sales, you can determine how many monthly subscriptions a single company had compared to the rest of the streaming industry. With this in mind, there are five steps to calculating market share:
Select the period to analyze. It'll be easiest to obtain monthly, quarterly, or annual data. Keep in mind that you must gather information for both the specific company you wish to analyze as well as the entire industry they reside in.
Select your market share basis. You're most likely to see market share determined by dollars of revenue. However, you can select non-financial aspects of a company as well. For example, instead of seeing what a company's total revenue is compared to the industry total, you can analyze a company's total number of customers compared to the industry-wide number of customers.
Determine the single company's total. Again, this can be the total revenue from a specific period or a non-financial metric like the number of units sold. You can obtain market share data from various independent sources such as trade groups, regulatory bodies, or periodic financial disclosures issued by the company.
Determine the industry-wide total. This figure must correlate to the data source in Step 3. It must cover the same time period, and it must be determined using the same methodology. For example, if the data selected in Step 3 is limited to a specific geographical area, the data in Step 4 must also be limited to this region.
Divide Step 3 by Step 4. By dividing the company total by the industry-wide total, you're left with a percentage that represents the size of the company's presence in the total market. Companies with high percentages have a greater market share, and your quotient should not exceed 1 (as a company cannot own more than 100% of any aspect of an industry).
Example of Market Share Calculation
Suppose you want to calculate a toy manufacturer's market share over one fiscal year. The toy manufacturer had total revenues of $20 million, and the toy manufacturing industry had total revenues of $200 million over one fiscal year. To find the toy manufacturer's market share, divide $20 million by $200 million. The manufacturer's market share is 10%.
The toy manufacturer then releases a new product that captivates its target audience. During the first quarter of the following year, the company had total revenue of $10 million, while industry-wide revenue was $40 million. The company's market share has now increased to 25% of first-quarter sales.
Doing deeper analysis, it was determined that the toy company sold to 10,000 customers during the first quarter. In total, 31,250 customers purchased toys during this time. Although the company's market share in terms of dollars was 25%, the company's market share as a factor of total customers was 32%.
Comparing Market Share in an Industry
Market share can also be used to compare similar companies within the same overall industry. For example, suppose one technology company has a 20% market share while a second technology company has a 15% market share. This signals that the first company has a larger market presence than the first company.
It is also possible to use market share over multiple periods to see how well a company fares against its competitors and whether the company is growing. In the following year, let's imagine the first technology company has grown to a 25% market share. However, its competitor has doubled in size and now controls 30% of the market. Though the first company has scaled, it has been outperformed by the second company which now has the strongest presence.
Analyzing Market Share
When analyzing market share, there are a few things to consider:
- How has a company's market share changed over time?
- How has the market share of each competitor of the company changed over time?
- How many competitors are there in the industry?
- What is the company's long-term strategy? Is their objective to scale or to maintain their current product line or client base?
- How reliable is the underlying data used to analyze market share?
- What are the underlying trends of the industry? Is a company with a high market share at risk of innovative companies stealing market share in the future?
Why Is Market Share Important?
Market share is an indicator of which companies are leading their respective industries. When a company controls most of the market share, they are recognized as the leader in their field. Companies that control the market usually have stronger brand recognition, broader competitive advantages regarding price and product placement, and more efficient scaling opportunities.
Companies are always looking to expand their share of the market, as well as grow the size of the total market by appealing to largerdemographics, lowering prices, or using advertising. Companies with a larger market share have more effectively organized their company to appeal to the broad market, while companies with a smaller market share may be young or yet to appeal to the broad market.
When making an investment decision, it is important to analyze market share to decide whether the company aligns with your investment goals. Companies with a larger market share may be safer investments, though their upside may be limited as they have already achieved market success. Alternatively, companies with a lower market share are at risk of being pushed out of business though they offer greater long-term potential if they find success.
What Is Market Share?
Market share is the measurement of how much a single company controls an entire industry. It's often quoted as the percentage of revenue that one company has sold compared to the total industry, but it can also be calculated based on non-financial data.
Why Is Market Share Important to Investors?
Market share informs investors of how successful a company has been compared to its competitors. If a company has a high market share, it is a successful company that has secured customers, likely has a recognizable brand, and it's more likely to be a less risky investment. Alternatively, companies with low market share provide higher investment upside, though the success of the company is still to be determined.
Is It Good to Have a High or Low Market Share?
In general, it is often better to have a high market share. If a company has a high market share, they are well-established in an industry and have likely achieved some level of success. If an investor wants to pursue riskier endeavors in younger companies yet to control their market, it is better to seek out companies with low market share.
The Bottom Line
A company's market share tells investors how much of the market a company controls, that is, a reflection of how in demand and popular a company's products or services are. Higher market shares indicate a company to be more dominant, which signifies higher revenues and generally higher profits. A lower market share can indicate a weakness in competitiveness or signify a company's inability to continue operating; however, it could also just mean a company is new in the industry and has yet to prove itself.
