Business leaders and economic analysts chart the growth and overall performance of businesses in many different ways. While some of these methods compare a business's recent performance to its past performance, others examine each business within the context of the markets where it sells goods or services. This approach uses market share to determine how competitive businesses are within the spheres in which they do business.
What is the Market Share Formula?
The basic formula for market share is comprised of simple division. The numerator is the total sales for a specific business or product. The denominator is the total sales for the market as a whole. Multiplying the result by 100 will reveal the business's market share as a percentage of the entire market.
Market Share Example
For example, if a business sells 1,000 electric sports cars in the United States in a given year, and the total sales for electric sports cars from all sellers is 5,000 for the same year, that business's market share is 20 percent. Another company that sold 50 electric sports cars during the same period has a market share of 1 percent. The first company's 1,000 cars, and the second company's 50 cars, are all included in the total 5,000 car figure.
What is a Market?
The formula for determining market shares does not include any specific method for defining a market. The definition of a market varies from one industry to another and may vary between studies or analysts. In any case, a market must be specific in terms of the products or services it includes, the geographic region it represents and the time frame it covers. The same business may have a 20 percent market share for electric sports cars in the United States in 2018, but only a 2 percent market share for all types of sports cars in North America from 2017 to 2018. The difference comes from how the market is defined before applying the formula and computing a market share.
What are Sales?
The market share formula also relies on a standard definition of sales. In general, sales can mean one of two things. Unit sales refers to the number of products or service units a business sells. Value sales multiply this number by the price of each item, and measure a market in terms of dollars rather than units. Since the same products may sell for different prices within a market, each method is useful in some cases. Companies that sell higher end goods in a market that includes a range of products may have small unit market shares, but higher volume market shares, since they take in more revenue for each product they sell.
Why Market Share Matters
The results of a market share computation provide data for a number of purposes. A business with a large or growing market share is outpacing its competitors in terms of its visibility within the market and its ability to meet customer demand. Likewise, a shrinking market share may indicate that a business is struggling to compete or purposefully extricating itself from a particular market to focus on other markets instead. Individual elements of the formula have value as well. For example, total sales for a market show growth in the market over time.