Relative Market Share Formula
To calculate the relative market share, we take the market share of the company in question and then divide it by the market share of its top competitor.
The formula to calculate the relative market share is as follows.
Relative Market Share = Market Share of Company ÷ Market Share of Top Competitor
How Market Share Impacts Profitability?
Growing market share is directly tied to achieving scalability, which in turn improves profitability, i.e. economies of scale and network effects.
Market leadership and sustainable long-term profits go hand in hand, as both come from the same underlying drivers.
There is a clear connection between market share and profitability, as market leaders tend to be more profitable than those with low market shares.
Companies attempting to obtain more market share are, more often than not, spending cash at a rapid pace – whereas mature companies possess more established business models and operate with greater efficiency.
Often, companies with stable, long-term market leadership that have been able to maintain their position consistently are perceived to have an “economic moat.”
Top-Down Forecasting: TAM Revenue Model
The current market share of a company and the market size are important pieces of top-down forecasting, which is an approach used to project sales using a company’s total addressable market (TAM) and a market share assumption.
If a company’s market share has been growing in recent years, its current and projected growth rate in all likelihood is outpacing that of its industry peers.
Conversely, if a company’s goal is to maintain its existing market share, it must continue to grow at the same rate as the total market.
How to Increase Market Share?
The notion that offering the most innovative products and services mix can increase market share certainly has its merits.
Generally, capturing more market share stems from delivering the most value to customers and providing the leading user experience available in the market.
But there are exceptions, such as marketing-oriented industries where competition is based on reputation.
Still, creating value propositions that satisfy unmet customer needs is a reliable route toward obtaining market leadership.
Companies with differentiated, innovative offerings can grab a higher percentage of a market easier, as customers migrate from their competitors that might lack technical capabilities.
How to Protect Market Share?
Customer retention is arguably more important than new customer acquisitions when it comes to protecting market leadership, especially over the long run.
Therefore, companies must strive to reduce customer churn, which is a function of understanding their customers’ specific needs – i.e. insights enabling companies to serve those customers better.
After building trust and loyalty with their customer base, companies can benefit from more reliable sales, as well as more organic growth and “word of mouth” marketing.
Companies must also continuously reinvest (e.g. capital expenditures, research & development) and be prepared to adjust to unexpected developments in the market.
Alternatively, another defensive tactic is to acquire high-growth companies, which nowadays are usually technology-oriented.
If market leaders become complacent and stop improving, it is only a matter of time before a different company disrupts the market to capitalize on the opportunity.
The downfall of Blockbuster (and the success of Netflix) is one frequently used case study of an incumbent refusing to adjust to changing consumer trends until it was too late.
Market Share Calculator
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Market Share Calculation Example
Suppose a company generated $10 million in sales during its latest fiscal year.
If we assume that the sum of the sales generated by all the companies in the industry amounted to $200 million across the same period, the company’s current market share is 5%.
- Company Sales = $10 million
- Total Market Sales = $200 million
- Current Market Share = $10 million ÷ $200 million = 5%
And if our company’s top competitor brought in $40 million in sales over the same period, the relative market share is equal to 25%.
- Top Competitor Sales = $40 million
- Top Competitor Market Share = $40 million ÷ $200 million = 20%
- Relative Market Share = 5% ÷ 20% = 25%
