Companies always have the challenge to understand what their competitors do in the market. To figure this out, companies try to evaluate an index which is stated as market share. It is an index which clearly explains the company’s situation within the market. In an easy way, calculating it simply answers these two questions: where we are, and where we stand. There are some parameters which should be defined and considered in order to calculate the share of market; parameters such as revenue, product sold quantity, product shipment, and etc.
Calculating market share has a very simple formula, in different sources, the below equation is defined by different definitions of the parameters. The concept is to find a portion of defined parameters within the whole market.
Consider that it is assumed that the number of the sold products is used to define an equation, here is the equation:
Market Share of firm i = (Total product sold by firm i)/(Total product sold in the market)
You can use revenue or the number of shipment or volume of sale instead of a sold product to define the above equation. As it is evident, this is a very simple equation but it can be so risky if the boundary of the parameters and market does not clarify well at first.
As an example to explain why clarifying boundaries is important, imagine a tire production company wants to calculate the market share and tries to sample the multi-brand dealers in 7 different cities which are in its customers’ list. By this sampling, if they generalize the calculated share to the whole market, they have made a mistake because they lose some parts of the market. The part which does not sell their product (Multi-brand dealers which do not sell their product) as well as the part which specifically sells some products (brand shop of other competitors) are missed in this sampling method. So they may face a problem if they make a decision based on this share. Another example, a smartphone company wants to calculate its share in the US; the factory is in the US, too and the revenue is its parameter to calculate. Let’s think the company adds its export revenue to product sell revenue inside the US and calculate its share of the market. What happens if this assumption takes place? They overestimate their market share and may make a decision which leads them to a wrong way. So that’s why it is mentioned that calculating it is easy but risky.
In the above examples, some important items are mentioned which should be taken into consideration when a firm wants to calculate its share of the market, Items such as distribution channel, product type, and geographical coverage.
Technically speaking, in most cases the market share means a share of the actual sales (either in quantity sold or monetary volume) for a product in a given period and in a given geographical area.
Based on this definition, it should be analyzed within specific periods of time and geographical scope. As an example when it is announced that Apple’s market share in smartphone market is 19.8%, we cannot get a precise information from it, but if announced Apple’s market share in the fourth quarter of 2017 in an international smartphone market is 19.8%, it makes sense and everyone who reads it can figure out what is exactly clarified.
After all the above concepts and definitions, the question is what should be done to calculate the share of the market? There are some primary, key and practical steps that should be taken. Like many other analyzing works, we have to think from a simple part to whole.
Let’s name the steps:
Every above step is important and cannot be prioritized. Imagine you want to start analysis without knowing SKU list, or data gathering method is not specified, so the outcome is surely affected if one or more of the above steps are missed.
Here it is clear that market share is an index, not a strategy. Companies should not make a mistake to announce that their strategy is to increase theirs. They have to have different marketing plans in order to develop their income, and one of the indices that shows this growth is market share, which is the important one. Sometimes when an individual market develops itself, one option that firms can choose is to maintain their share of the market rather than choosing an option for growing their share. As an example in the commencement of smartphones industry, a company shipping 40 million pieces of smartphone in the whole market, which held 10% of the market share; after a four-year period, the total shipment increased to 200 million units (preserving the same share as before). So if a company preserves its share of 10%, its revenues increase due to the whole market growth. This was just an example to clarify that looking into market share index should be general and deep in order to find out what exactly can be useful for the companies to preserve their position in the market.