Market share is a company's percentage of sales in a particular industry. Both increases and decreases may affect profits, so managers typically adjust operations and marketing strategies to increase or decrease it as needed. People also look at this figure before they invest in a company, since it can indicate a business's competitiveness. When discussing this topic, it's important to remember that a share market is something different: it's the exchange of companies' stocks.
Calculating Market Share
Market share can be calculated either in terms of the money earned from sales or the number of units sold. The basic way of calculating this percentage is just revenue or units sold divided by that of the total market: for instance, if a computer store sold one out of every four computers, it would have a 25% market share. Real-life calculations are a little more difficult though, since the numbers can change drastically based on how a business defines its market. Adjusting for inflation and the way that sales or units are counted has an impact as well.
For instance, a company could get a completely different percentage if it considered itself as compared to a global or local market, or if it calculated orders fulfilled rather than orders made. Likewise, even if a company had a very large share, it may not be as profitable as it initially seems if it has to pay very high taxes or labor costs. Since there are so many factors to consider, managers usually use a combined calculation of units and revenue and use these figures as only one small part of their in-house statistics.
Importance for Businesses
This information is really important for businesses, since it can help managers make better-informed decisions for increasing growth and profits. Having a large market share also has some practical benefits: it can also make it easier to get products and supplies more cheaply, since it is able to buy in bulk. This in turn can help with sales, since the company can stock more of an item, meaning that people will be more likely to go there to buy it since they can be reasonably sure of getting it there. Additionally, businesses with a big presence in the market are seen as a worthwhile investment, as they usually profit by keeping up with the whole industry.
Despite this, having a larger market share isn't always a good thing. It might not be profitable if the increase is associated with expensive advertising or a big price decrease. A company may not be able to meet the demand of an increased percentage of the market without huge investments in new equipment and employees. Too much of an increase also may not be beneficial if it violates a country's anti-trust laws. Additionally, if a company values its share of the market above sustainable practices, it can cause big problems in the long run.
Importance for Investors
Knowing a company's market share is also important for investors, since it can give them a better idea of its competitiveness. Though this doesn't always go hand in hand with profitability, it's often a good indicator of whether a business is performing well or not, and drastic changes often indicate problems or changes for the better. Those with larger shares are often more likely to give investors a better Return on Investment (ROI) than those with a very small share, though there are a lot of other factors at play.
There are many different ways to increase market share; companies usually use a combination of strategies. Sometimes something as basic as increasing advertising can have huge effects, as can adjusting pricing. Breaking products into groups and targeting them at specific demographics can also increase this percentage, as can making complementary products. Another strategy is improving the product or service itself, which can attract customers from competitors, though this can be difficult, so many companies try to grow along with a growing market rather than trying to take business from the competition.