Market share is the percentage of the total sales in the market made by one organization. It is a key indicator of the competitiveness of a company. Besides, market share assesses how well a firm copes with a competitive situation in the market and how satisfied people are with the quality of the firm’s products or services. It shows the business's market position among other competitors.
Market Share explained
The market share indicator helps track not only the increase or decrease in the market, but also trends in consumer behavior. It is the portion of the sales volume of an organization, which is known, to the total sales volume of all companies offering similar products in the market where the company operates. To determine it, you have to decide on the period – it may be a three-month period or a one-year period.
The next step is to calculate the total number of units the company and a group of businesses operating in the same sector have sold over the period. Then you have to divide these two indicators. For some industries, this information is freely available and may be reflected in market research reports of the particular country or region. Some companies offer detailed market research to make this process easier.
Importance of Market Share
Investors and people who are skilled in analysis pay attention to the change in market share as it helps business owners understand what the competitive position of the company is. It is much easier to evaluate the effectiveness of marketing techniques and plan a business-to-consumer marketing strategy for the future, based on this indicator. In addition to this, a business that increases its market share value will grow the total number of income and sales faster than the peer groups.
Market share can have a great impact on financial performance of the company and business expansion. In order to improve a company’s competitiveness and grow the sphere of influence, business owners need to retain customers and increase the market share using the strategies stated below.
Lower prices. Offering good discounts will attract customers’ attention and affect their decisions.
Improve the quality of your products. Introduce new product features to stay competitive and unique in the market. Develop new products and services that will be useful for your target audience. But before taking such actions you need to do research and decide whether investing money in product modernization and development is worth it.
Increase customer loyalty. Use customer incentives, such as discounts, free samples, coupons and other things to reward loyal customers. Show clients that you value them using different techniques.
Focus on market segments. Analyze the preferences of your current target audience and decide on how you can attract new potential customers with similar needs and interests. There are a lot of methods for attracting new audience: social network advertising, giveaways, referral programs, etc.
Introduce cutting-edge innovations. Customers can be interested in new unique technologies they have never seen before and this may be the reason why they will turn to the company.
Hire competent workers. The most successful companies have the most gifted employees. Such companies don’t have to worry about the cost of employee turnover and it allows them to concentrate on other important competences. Decent paying jobs retain highly effective employees. Besides, other factors are the opportunity to work during a period of time convenient to the employees and less rigid workplace environment.
Acquire a company. It is possible to gain market share by purchasing another company in the same industry. One of the examples is the acquisition of Instagram and Oculus by Facebook. It means that the company increased market share due to an acquisition of the social network that has a different audience and a firm that manufactures virtual reality devices and digital services that also has their own audience.
Business owners should take into account that both an increase and a decrease in market share can affect the change in value of the company’s stock.
Effect of Market Share
Changes in the indicator strongly influence both financial and non-financial aspects of organizations that belong to cyclical industries (they are characterized by a special sensitivity to the business cycle). On the other hand, businesses in high-growth industries are less affected by such changes as the increase in revenue and the profit after the sale of one unit (a good or service) are considered to be more important criteria.
Operating in cyclical industries is quite hard as competition among existing firms is intense. Business owners have to spend money on marketing activities to increase the number of sales.
One of the tactics they use is lowering prices in order to displace competitors from the market and gain market share. After that the customers can observe a price increase.