Thursday, August 11, 2011

Step by Step to Calculate Market Share – GEC Business Review

by Kelvin Wong

In short, market share is the percentage your company has of an overall market.



Your company’s market share is integral – whether to outclass your competitors or maintain current market position or an investment in a company, a business requires information on how its business has been operating in comparison to its competitors. By knowing the year-on-year sales figures is insufficient!

For an example, if your company sells "new cars," market share will tell you the percentage of all "cars" made in the world they sell. If your company has a growing market share, it is considered positive. Losing market share in the other hand is negative.

Why is calculating market share so important?

Calculating market share allows you to determine where you stand in your industry, and the growing tendency on a positive/negative trend. Calculating your market share on a regular basis serves as a part of your ongoing internal reporting, at least annually, but preferably half yearly.

In brief, it’s best to understand on the three important questions below:

Market potential - "How many Ringgits/Dollars are there in this market for my business?"

Market share - "How much of the potential in the market have I captured?"

Market opportunity - "Which markets/niches offer the greatest opportunity for growth?"

Later, question on products and/or services sold should be considered:-

1. Should I calculate market share based on Ringgits/Dollars or units?

2. Should I take into account booked orders or delivered orders? (automobile sales is a good example)

3. If I calculate in Ringgits, should I compare real Ringgits year-to-year or should I adjust with inflation?

Finally, question on market size should be considered:-

1. How do I define my market? As for automobile industry, should I include used car sales though I’m selling new cars?

2. Should I include all states or only the ones where I am active?

3. Should I include taxes?

4. Should I include the service component? (automobile after sales service)

After determining the criteria above, you can proceed to define your market and start calculating your market shares. GE Consult experts recommend the following steps:

FIRST. You should define your market before you can calculate market shares. Try specifying the market you are trying to calculate.

SECOND. Search for the total number of items are sold within your market. Google.com is a great place to find sales figures of large corporations. Simply take to look at their quarterly and yearly findings about the product(s) you are interested in. For instance, if you are looking for Apple, check the number of how many iPods and iPhones the company has sold, how many has intention to manufacture, to expand, etc. Of course, you should not overlook the number for every company that competes in the same market space.

THIRD. You should be dividing the number of units that your company (or the company that you are interested in precisely) has sold by the number of total units in the space.

FOURTH. You should calculate the percentage of market share. The most simple equation would be if your company for example sold 10 cars and the industry sold 100 cars in total. It’s easy then to calculate that your company would have a 10% of market share. Include numbers you’ve obtained in previous steps and you should be sure about your shares and was your investment wise.

FIFTH. You should determine if the market share is growing or shrinking. Earnings coupled with a growth for sure propel a stock higher. If your company is gaining market share over competitors in a so-called hot market, then it may make it an attractive investment. You should always consult your broker or do your own due diligence before buying. Conversely if it is losing market share, then you might want to look at the competitor who is stealing it.

Having had an easy understanding on how to calculate market share, it’s definitely learnt how misleading a market share calculation can be. Thus, the summary hereunder to use market shares effectively:

1. Always determine your criteria clearly and ensure you are comparing "apple with apple" but not “apple with orange”. 
2. Beware of market research and/or market reports which often lack explanations of how the market share calculation was calculated.

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