Market Share

Rafat Abushaban

- Sales #  O 4.4K views   اقرأ بالعربية

Summary:Market share is the percentage of total sales generated by a certain business in a given industry.

Market share refers to the influence of a business of the market in a given industry as a percentage. The greater the percentage, the more influence the business has over the market. This influence is measured in terms of total sales vs. competitor sales.

Market share has a direct effect on a company's valuation and stock price.

Market share formula


Market share formula is calculated straightforward using the following equation:

Market shareTotal sales for the business x 100
Total sales in an industry

Market share is calculated by dividing the total business sales over a certain period of time by the total sales of the industry over the same period. This equation helps in understanding the relevant position and influence of a business against all of the competition combined.
For example, if we have company ABC selling $10 million in home appliances a year, and that the market size in Morocco is $100 Million annually, we apply the equation:

Market share for ABC Annually$10 Million x 100
$100 Million

Therefore, ABC owns 10% of the Morocco Market for the last year.


The Market Share Matrix


market share matrix

In order to understand market positioning better, especially in regards to products and services offered by a business, the Boston Consulting Group (BCG) Market Share Matrix was developed breaking down products into four sections: Stars, Question marks, Cash cows, and Dogs.

  1. Stars are products in high growth markets where the business already has a significant market share potential, and thus they make good opportunities to invest in.
  2. Question marks are products and services in high growth rate markets, but here the business does not possess a significant market share. While it is good to invest in high growth products, it is important to analyze and validate if they will help the business gain more market share, otherwise they will be a waste of resources.
  3. Cash cows are low growth products and services with large market share and revenue generation. When the business is already established and has a large market share, it should keep milking these cash cows as long as possible to generate "easy" profit.
  4. Dogs are products and services with low market share and low rate for growth- in other means they are depleting resources of the businesses without creating much value. Such products should be sold off or discarded from the business.


So to sum the matrix up, a business should keep cash cows and invest in stars, keep an eye on the question marks and get rid of dogs.

Market share analysis importance


Market share is of a special interest for entrepreneurs. Ever noted how a pitch-deck goes? you will usually notice founders showing figures of market size, and the market share their startup has gained (or is prospected to gain). Make sure to check out our guide on how to deliver a great pitch deck.
 
On another hand and following the market share matrix, new startups should identify stars and question mark products of other successful business to focus on, while established businesses should prioritize managing existing cash-cows and dogs to utilize existing resources.

How to estimate market share for startup companies?


When developing a startup business model and business plan, it is essential to calculate expected market share. Estimating market share well is often seen as a strong indicator for judges and investors of how-well founders understand the market and what their vision for the business is about.
 
To calculate market share for your business in the future, you have two ways to go about this:

  • Undertake primary research: this means going to direct field-research and collecting data directly from customers and market, which could be a complicated and costly undertaking in most cases
  • Undertake secondary research: utilizing previous findings and existing market data will help save you time and money, and get a quick understanding with the minimum amount of time and effort. This is, after all, why statistics centers and market data websites do.

We'll adopt the second approach for now as it is easier and the most commonly used method. You can find existing research data for free or for a fee if you search for it online. You can now estimate your startup's market share following the steps below:

  1. Understand the Business Problem
    Understanding the exact business problem your business targets is essential in order to understand the industry and market you are in. Learn how to identify your business problem here.
  2. Understand the Customer
    Once you get the problem right, you need to address who is your Avatar or ideal customer. Identifying your ideal customer can lead to understanding where to find and target this customer, how many such customers are there to target, and how to get to them.
    For example, if we have a business called "Aspiring" that is targeting restaurants in Saudi Arabia, it looks it up and understands that there are about 11,300 restaurants, making this the size of "Aspiring" market.
  3. Total sales in the market
    Looking data up, we found out that the total amount of sales projected within the food sector in Saudi Arabia for 2021 is $78.5 Billion. Note that this is the whole sector, not the restaurants industry. We'll need to dig deeper to find the percentage of business services to restaurants out of that total amount. Let's assume for now the percentage for 2021 was 0.5%, so we have $392.5 Million. This is the total sales in the market industry projected for 2021.
  4. Total sales for the business
    For this step, you will have to have a feasibility study and financial plan in place. In this plan, you should be able to point out the total sales for the business project for the first 3 years. Let's say that the first year is 2021 and the projected sales for restaurants is $10 Million.

Now we can finally calculate the market share as per the above equation

Market share for "Aspiring" in 2021:$10 Million x 100
$392.5 Million

Therefore, "Aspiring" expects to gain 2.5% market share of the Saudi restaurant sales for 2021.