Market share

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It’s all about the size of your slice.

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Market share is the percentage of total sales in a particular market that is supplied by a single company. It’s a way to measure a company’s competitive standing by comparing its sales with those of its competitors or the overall market. In general, market share is measured in either sales revenue (i.e., dollars or other currency) or by the number of units sold.

The general formula for market share is:

Market share="company" sales ÷ total market sales × 100

For example, suppose a computer manufacturer generates $10 billion in annual sales in a market where total sales are $40 billion. In dollar terms, its market share would be ($10 billion ÷ $40 billion) × 100 = 25%.

But what if the company sells 4 million computers at $2,500 apiece, whereas its competitors sell a combined 20 million computers at $1,500 apiece? Its market share by unit volume would be (4 million ÷ 24 million) × 100 = 16.67%. The market share depends on whether you’re measuring sales revenue or the number of computers sold.

Different industries often favor different ways of measuring market share, depending on what they’re selling and how prices vary among competitors. For example, the auto industry uses unit sales to compare market share among manufacturers, whereas retail banks track deposits. In general, however, it doesn’t matter which method you use, as long as you’re consistent.

Market-share analysis is a way to evaluate the effectiveness of a company’s marketing strategies and determine whether they’re meeting its objectives (e.g., gaining customers, increasing sales, and/or taking market share from competitors).

For an investor, changes in market share can offer clues about a company’s competitive position and its prospects for future growth. For example, a company that gains market share may benefit from economies of scale: Buying in bulk, sharing resources, and combining operations can lower costs. Greater market share may also give a company more pricing power with customers and suppliers.

A company can increase market share by developing new products, expanding into new markets, or acquiring a direct competitor (“horizontal integration,” in business lingo). But market share isn’t the same as profitability. For example, cutting prices or spending heavily on advertising in order to win customers might increase market share but have a negligible—or negative—effect on the company’s net profit.

Also, a company with a large share of a shrinking market may still face declining revenue. For example, Eastman Kodak (KODK) held 80% to 90% of the photographic film market through the 1970s and still held roughly two-thirds of it in the early 2000s. But as the world switched to digital photography, U.S. film sales dropped from about 1 billion rolls per year in the late 1990s to just 20 million in 2011. A dominant market share couldn’t save Kodak from filing for bankruptcy in 2012.

Market share also plays a role in antitrust regulation. The Herfindahl-Hirschman index (HHI), for example, uses the market shares of competing firms to measure concentration within an industry. Higher values indicate greater market concentration and potentially less competition. Like market share itself, the HHI can be calculated using sales revenue or unit volume, depending on the industry and how the market is defined. The same measure must be used for all companies being compared.