Market share explained
Market share (also known as absolute market share) is the percentage of total sales in one market or industry contributed by one company. This is typically determined by revenue but is often calculated based on unit sales.
How is market share calculated?
Market share is calculated by dividing the total sales of one particular product or industry by the sales of one company over the same period of time. For example, if UK consumers spend a total of £100 billion on groceries each year and Green Grocer Co’s sales amount to £4.5 billion over the same period, then the company would hold 4.5% of the UK grocery market.
The smartphone industry is one of many that sees market share determined by unit sales rather than revenue figures, but the principle remains the same. If ten billion new smartphones are purchased worldwide in one year and Phone Co sells one billion in that timeframe, then it holds a 10% share of the global smartphone market.
Read more about how to trade stocks
Why is market share important?
Market share provides an insight of how big a company is in relation to the rest of the market as well as its peers. It is used to determine what company is the market leader and, by tracking it over different periods such as every quarter, investors can determine those companies that are gaining share and those losing it, and therefore who is stealing market share from who.
Understanding what metric is being used — whether its revenue, sales or something else — is important to understand as the share can be drastically different depending which one you go by. One company can sell 5000 cars for £12,000 each while another can sell just 50 cars for $120,000 each. It all depends what market you’re talking about.
When calculating market share (or to understand how an existing figure has been calculated) it is also important to consider all the metrics; what timeframe is it based on? Is it calculated on one singular product or a broader category? Is it domestic, regional or global market share? Like all statistics, there are many ways for them to be skewed so taking all these types of considerations into account is worthwhile. This is also why you get confusing but increasingly precise claims about how popular products or companies are: for example, the Metro newspaper claims to be 'Britain's most read newspaper', while The Sun claims to be 'Britain's best selling newspaper' and the Telegraph is 'Britain's most read quality paper' — it all comes down to the wording.
Understanding how the market is shared out between each company also paints a picture of the industry: demonstrating how close competition is at the top, showing if a market is fragmented and shared between many companies or dominated by a few, and revealing trends such as whether consumers are moving from one type of product to another.
What is a market leader?
The market leader is the business, product or brand that holds the largest individual share of a particular market. Although a company can technically be a market leader with a small percentage of the overall market (if it is a highly fragmented market, for example, with no dominant players), the term is usually reserved for those that hold a substantial portion of the market and can materially influence the wider industry with its decisions.
For example, Amazon is the market leader when it comes to e-commerce in the US and Netflix is the global market leader of the video streaming market. Because they are the most dominant players in their respective markets with large chunks of their markets under their control, decisions made by both companies are likely to have wider ramifications for the industry.
On the other hand, in a highly fragmented industry no single company, brand or product holds enough market share to influence the direction that the wider industry heads. The vaping industry that has taken off in recent years is an example of an industry where, currently, no individual business or brand holds a dominant position: Imperial Brand’s Blu vape pen is one of the most popular brands in the UK but its market share stands at around 16%. While Big Tobacco (the five largest tobacco companies) is making every effort to capture this market like they did with cigarettes, they have a long way to go before earning the dominance they are used to amid a wave of new vaping companies entering the market. In these scenarios a company can technically be a market leader by holding the largest individual slice of the pie, but the influence they wield over the wider industry is not as great.
Market leader status is a crown that every player wants to own as it shows the business is ‘in charge’ of the market and outdoing its competitors.
Read more about the latest news and trade ideas from financial markets
How to estimate market share for new businesses
Calculating market share for new businesses or industries can be tricky. Market share and other similar data for fast-growing industries and mature markets is often gathered by independent bodies and regulatory outfits but finding reliable data for new businesses or industries can be harder as there is less demand or need to track such data.
For example, those looking for market share data on the UK grocery market have multiple sources to turn to as the industry is used as a barometer for overall consumer spending and how other economic indicators might move. Kantar Worldpanel is one of the most highly-regarded bodies to constantly track how market share between UK supermarkets is shifting. However, obtaining reliable data can be much harder for the likes of the UK gin or craft beer markets, both of which are highly fragmented.
If a new business is entering a mature market then calculating what share of the market it holds can be relatively easy as it is a case of comparing sales (or whatever metric is favoured) to the total sales of the market. While finding out how the entire UK gin market is broken up by share is difficult, it is much easier to obtain estimates on the total amount of gin being sold in the country. If Gin Distillery sells $5 million worth of gin in the UK during its first year of operation, when the country as a whole bought $500 million worth of gin, then the company holds a market share of about 10%. In this scenario, however, you are less able to compare how Gin Distillery’s market share compares to rivals in the market and how big it is relative to its peers. There are usually some forecasts if not hard data for overall market size no matter how small or fragmented the industry.
When attempting to calculate market share for a new business it is again important to remember what metric you are using. Are you calculating the share for one country or globally? Is it for overall company sales or just for one single product or brand? Although it can be harder to establish the market share of a new business it is a worthwhile calculation as it will allow investors to track its progress over time and whether it is gaining a foothold in the market or struggling to steal share from existing players.
Read more about trading terms used in financial markets
What is relative market share and how is it calculated?
Relative market share helps paint a broader picture of where a business sits in its market compared to its rivals and peers. Calculating absolute market share of one company only provides limited insight. If UK consumers spend £100 billion each year on PCs and Computer Co accounted for £30 billion then we understand it has a market share of 30% of the market and, therefore, that it doesn’t control the other 70%. This doesn’t help establish how it fares against the rest of the market nor establish its standing/ranking in the market.
Relative market share helps dig deeper by revealing how the company’s market share shapes up compared to its larger competitors in the market. Holding a share of 30% can make a company a market leader in one industry but maybe the second, third, fourth or fifth largest firm in another. Relative market share helps establish how Computer Co compares to bigger players in the industry.
The first way to calculate this sees the absolute market share divided by the portion of the market that the company does not control. In this example, this would see Computer Co’s 30% market share divided by the 70% of the market it does not control, equalling relative market share of 42.8% (30/70 = 0.428 x 100).
The second way requires knowledge of the share of the market held by the market leader. If the leading company in the UK PC market holds a 40% share, for example, then the calculation would see Computer Co’s 30% share divided by the leader’s 40%, equalling 75% (30/40 = 0.75 x 100). This demonstrates that Computer Co’s market share is equal to 75% of the share held by the market leader, giving investors an idea of how Computer Co is positioned in the market and how it fares against the biggest competitor. Tracking this will show whether Computer Co is gaining share over the market leader or losing it.
Another metric worth considering when dealing with relative market share is market concentration. This evaluates how fragmented a market or industry is and tells you whether it is dominated by a few players or if swathes of companies are battling it out in a highly competitive market. This can be calculated from two different points of view: how much of the market is controlled by the biggest players, or how much of the market is controlled by smaller players.
For example, over two-thirds of the UK grocery market is held by the top four supermarkets, meaning market share is highly concentrated between only a few larger players, while Imperial Tobacco’s market-leading but still rather small foothold in the UK vaping industry demonstrates share of the market is more widely concentrated between more companies.