Market Share Basics This module covers the concepts of unit market share, revenue market share, market penetration, relative market share, and market concentration

Market Share Basics

This module covers the concepts of unit market share, revenue market share, market penetration, relative market share, and market concentration.

Authors: Paul Farris and Stu JamesMarketing Metrics Reference: Chapter 2

© 2011 Paul Farris, Stu James, and Management by the Numbers, Inc.

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Before discussing market share, let’s discuss the non-trivial issue of market definition. A good first step is to define the served market in terms of dimensions such as geography, demographic, channel, time periods, etc.

Examples:• Brazilian drivers aged 20-39 in 2010• Purchasers of cold medicine at grocery stores in May• Spring tourists in Paris who plan to visit a museum

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MBTN | Management by the Numbers

InsightTo illustrate why market definition is essential, consider the difference between the definition of tourists visiting Paris who plan to visit a museum and tourists just visiting Paris. In effect, are we competing against museums or any potential tourist activity?

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Market definition with regard to market share can be applied in many different contexts – goods, services, segments, regions, channels, units, dollars, etc. What is essential to remember is that when calculating market share, one must compare apples with apples. Otherwise it is at best meaningless, or more likely, misleading and dangerous.

With that in mind, let’s turn to market share – why it is one of the most important metrics in business and how to calculate it.

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Market Share is one of the fundamental measures used in marketing. It measures the sales of a brand or product relative to the overall size of a market.

Market Share may be calculated using units or revenues, and both measures may have important implications for a company. Note that the difference between the two measures is price, as Revenues = Units Sold x Price.

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Definition

Unit Market Share = Unit Sales / Total Market Unit Sales

Market Share


Definition

Revenue Market Share = Sales Revenue / Total Market Sales Revenue

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Market Share is an indicator of how a brand is doing relative to the competition. It includes not only a customer’s assessment of a brand’s value proposition, but also other factors that influence sales such as advertising and distribution.

Unit sales relative to competition also may have an impact on unit costs if higher volumes of production lead to lower production costs. This may provide a competitive advantage to a company.

WH

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InsightIf a company has a higher revenue market share than unit market share it means they have a higher price relative to the competition.

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It is important to note that market share calculations only consider actual sales, not potential customers who ultimately decided against purchasing. This introduces the concept of market penetration which considers the total population of a market.

Low rates of market penetration may indicate unmet potential demand for products or low interest in the product category as a whole within the selected population.

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Market Share and Market Penetration


Definition

Market Penetration =Customers who purchased a product in the category

Total population

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Definition

Relative Market Share =

Note that this is equivalent to Brand Sales / Largest Competitor Sales

Brand’s Market Share ($ or Units)Largest Competitor’s Market Share ($ or Units)

Relative market share indexes a firm’s or brand’s market share against its leading competitor. This provides managers with a measure to compare the relative market positions of their brands across markets.

InsightIn some markets 20% market share might be a leading market position. In others it might be a distant #2 or even #3. Relative market share provides this additional dimension of analysis.

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ERelative Market Share and the BCG Matrix


The relative market share metric was further popularized in the 1960s by the Boston Consulting Group in its famous growth – share matrix, where relative market share is a surrogate for competitive strength.

Author: Ericmelse. From Wikipedia Commons.

The other axis, market growth rate, is a surrogate for market attractiveness and potential. While there are many issues with the use of the BCG Matrix, it remains a popular visual representation of a firm’s brands, partially because of its simplicity.

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Note that sometimes relative market share will be calculated as an index value from 0 to 1, where 0 is a brand with no sales in the market and 1 is the brand with the highest market share. This is the same as the previous definition except for the leading brand. For example, if Brand A has 50% market share and Brand B has 25% market share. Brand A’s relative market share will be 2.0 using the first definition, but only 1.0 using the second definition.

InsightIn case you’re curious about why marketers would define relative market share in this way, it is sometimes thought to give insight into the relative cost and pricing power of a brand. If your relative share is very small, your costs might be higher and your pricing power with customers, lower.

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Market concentration is the degree to which a relatively small number of firms accounts for a large proportion of the market.

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Definition

3 or 4 Firm Concentration Ratio = Sum of the market shares of the leading 3 or 4 competitors in a market

Market Concentration


Question: Which graphic represents the more highly concentrated market based on three firm concentration ratio?

Answer: The bottom graphic. It represents a concentration ratio of 100% and the top graphic is less (approx. 60%)

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Market Share: Sample Problem Set


A high growth market in Eastern Europe has the following five brands competing in two regions (yearly sales).

Total Units UnitsRevenues (South) (West)

Alfa € 9,000 200 250Boffo € 15,000 100 200Cafav € 6,000 150 0Defy € 6,000 200 200Efizz € 14,000 350 350Total € 50,000 1000 1000

Questions: What is Alpha’s unit market share in the West ?

What is Defy’s revenue market share?

What is Efizz’s combined unit market share?

What is Alpha’s price?

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Answers:

Alpha’s unit share in West = 250 / 1000 = 25%Defy’s revenue market share = 6000 / 50000 = 12%Efizz’s combined unit market share = (350 + 350) / 2000 = 35%Alpha’s price = 9000 / (200 + 250) = 20

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Questions: What is Cafav’s relative market share (units)?

What is Boffo’s relative market share (revenues)?

What is the 3 firm market concentration in the south?

What is the 4 firm concentration ratio (revenues)?

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Answers:

Cafav’s relative market share (units) = 7.5% / 35% = .214Boffo’s relative share (revenues) = 30% / 28% = 1.07 (Note: or 1.00 using alternative measure of RMS)3 firm market concentration in south = 35%+20%+20% = 75%4 firm concentration (revenues) = 30%+28%+18%+12% = 88%

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Questions: If the potential market in the South is 2000 customers and the potential market in the West is 5000 customers, what are the respective market penetration rates for this product category (presume 1 purchase / customer).

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Answers:

Market penetration in South = 1000 / 2000 = 50%Market penetration in West = 1000 / 5000 = 20%Overall market penetration = 2000 / 7000 = 28.6%

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Marketing Metrics by Farris, Bendle, Pfeifer and Reibstein, 2nd edition, pages 32-43.

- And -

Market Share Metrics (advanced MBTN module). This module provides further insight into the decomposition of market share and metrics that are essential to understanding what circumstances led to a particular level of market share.

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Documents

Market Share Basics This module covers the concepts of unit market share, revenue market share, market penetration, relative market share, and market concentration