Both absolute and relative market share are measurements that are used to calculate the position of a specific business in its market environment. Each offers a way to measure the performance of a business as it relates to competing businesses that operate in a similar field, though the two terms measure that relationship differently.
Absolute Market Share
Absolute market share is designed to show how a business is doing in its field alongside all of its competitors. It lends context to a company's performance so that the company and interested observers can view its financial performance outside of a vacuum, and it provides evidence of a company's influence in the market.
Relative Market Share
In contrast to absolute market share, relative market share works to measure a business against its single, strongest competitor. This is a way of measuring a business' strength in relation to either a company that is pursuing it or that it is pursuing. It's also a way of knowing where potential threats and opportunities lie. For instance, a market share leader would want to eye relative market share measurements with its top competitor to see if the competitor is making any inroads to cutting into their market share and swiping its customers.
The absolute market share of a company is calculated by dividing its sales by the total sales in its market. The result is presented in percentage points, showing the percentage of a market that a company represents. Relative market share is calculated by dividing a company's percentage share of the market -- its absolute market share -- by the percentage share of its strongest competitor. In this calculation, the leader in a particular market will always have a relative share that is greater than one, while the rest of the businesses in the market will have a relative market share less than one.
Both absolute market share and relative market share can provide businesses with insight about potential areas of growth. Absolute market share shows how much room for growth there is in the market overall, while relative market share suggests which competitors might have customers vulnerable to a shift. Both absolute and relative market share measurements often are compared from year to year in order to measure trends.
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- "Hidden Champions: Lessons from 500 of the World's Best Unknown Companies," Hermann Simon, 1996
- "The Concise Blackwell Encyclopedia of Management," Cary Cooper and Chris Argyris, 1998
- Concurrences Glossary of Competition Terms: Market Share