Market Share

Every firm should be concerned about its share of the markets and market segments in which it competes. By share we mean the percentage of market unit volume or dollar value held by a company as a proportion of total market size.

Market share is merely the proportion of total market or industry sales made by one of the competing companies. Market share may be expressed either in unit sales or dollar values:


Market Share

=
Total company sales (units or dollars)
-------------------------------------------
Total industry sales (units or dollars)

In general, attaining the highest market share is a desirable objective. The rule is that, regardless of the price of your product, you will remain more profitable than your competitors if you have higher market share. However, you must be careful to ensure that your market is clearly defined. The underlying reason why small companies can function profitably in large marketplaces is that they have actually developed a large share of a small segment of the total market.

Methods of Measurement

The two primary groups you can interview or survey to make the market share measurement are:

  • Competitors
  • Customers
We feel the most reliable, accurate, and fast approach is to base market share measurements on competitive interviews. It is reliable and accurate because it is possible to interview 100 percent of the population of competitors. It is fast because there are about 25 competitors in the typical market. The range typically is between five and 100.

We recommend that this measurement be done by completing competitive interviews over the telephone. Some of the key questions that should be asked are:
  • What were your unit shipments in 199X/200X?
  • What were your sales in U.S. dollars?
  • What do you believe your market share is?
  • What do your believe your key competitors' market shares are?
  • What do you believe the total market size is?
  • Which companies are gaining market share and which are losing market share?
  • What is the price of your product?

Obviously, many competitors will not answer all of these questions posed in this manner and this order. You can improve your response rate by blending them into a very free-form and smooth conversation and by sharing information with the interviewee. For example, tell the interviewee what one of the key competitors feels about the company or its sales. This usually gets them involved.

It is also important to build a verification process into your interviewing strategy. Some of your respondents will be stumped. They will not know the correct answers, or may not tell the truth. A verification strategy will help eliminate these problems.

A verification strategy entails interviewing multiple people in the same organization to cross check sales figures, and by asking competitors their opinions about the accuracy of the responses received. You should also then multiply the average price of the unit by the unit sales to see if it matches the dollar sales given in the interview.

Once you have completed all the interviews, you will end up with a chart like that in Figure 1.

Figure 1 - Market Share: Measurement Example

Company 1990 Sales (USD Million) Market Share (%) 1990 Sales Units (Actual) Market Share Units (%)
A 17 10 34,500 14
B 49 28 91,000 38
C 112 62 114,000 48
Total 178 100 239,500 100

Note: All figures are rounded. Source: Frost & Sullivan

From the sales figures and the total market size, you can calculate market share.


Market Share of Company 'X'

=
Sales of Company 'X'
------------------------
Total Market Size

The other group you can interview or survey to make a market share calculation is the customer group. You can do this by a telephone survey, a mail survey, or trade show interviews.

The disadvantage with customer interviews is that you must perform a lot of them to get a fairly accurate estimate of market share. Also, the estimate of market share is usually based on installed units in use and not a specific year of sales, so it is difficult to measure the market share of new entries into the market. Their relative importance will be greatly diminished.

To avoid this, a questionnaire with standardized questions must be designed and tested, as specified in the measurement instruments chapter. The following are some of the questions you should ask:
  • How many units of this product did you purchase this year?
  • What brands or product types were purchased this year?
  • What brands are you currently using?

Figure 2 illustrates a sample of the consolidated responses from this survey and shows how to calculate the market share from the responses.

Figure 2 - Market Share: Calculation Based on Customer Interviews

Company Product Name No. of Customers Using Product Market Share Installed Base (%) No. of Products Purchased in 199x Market Share 199x (%)
A 1 1,012 43 72 29
B 2 842 35 62 25
C 3 531 22 114 46
Total 2,385 100 248 100

Note: All figures are rounded. Source: Frost & Sullivan

You can also see that company C is probably a newcomer to the market because its share of the installed base is less than their market share based on new customer orders in 199X.

This is not the best method to calculate market share, but it does provide some valuable strategic information.

What Does Market Share Really Tell You?

We believe that market share is among the most vital parameters in the market research monitoring process. It is a critical indicator and, if we were permitted only one market research measurement, this would be it.

Like temperature to human health, market share is a key indicator of the health of your company. In our experience, the majority of companies overestimate their market shares by a factor of two mostly because they do not engage in comprehensive competitor monitoring. Another problem is that marketing managers are often excessively optimistic when estimating market share. Rarely have we seen the market share parameter underestimated.

One of the most important aspects of market share to monitor is how it changes over time. If your sales are growing each year but your market share is declining, you have a real problem that you might miss if you are only watching sales. Watching market share over time should be a vital part of your strategic marketing plan.

Market share will also suggest the safety and stability of your firm's position in the market. A very small market share, less than 10 percent, could possibly be absorbed by a large competitor, while a 50 percent market share is far more difficult to be lost.

Case Study: Pollution Management Equipment

The company we are looking at here was one of the pioneer firms in the pollution management industry. Over the years, the company developed a full line of very accurate and reliable air pollution instruments that were touted as among the best in the world.

When a research study was commissioned several years ago, middle management was in an uproar. The study was said to be unnecessary and a considerable waste of money. The opinion that appeared to prevail was, "We have been in the market for 25 years and we know everything that there is to know."

We discovered that the firm was one of five truly international companies selling air pollution measuring instruments and was clearly the market leader in sales volume and product technology. We asked ourselves, "Was the study in fact a waste of money?"

The first step was to learn everything we could about what the middle-level managers in the company knew about the market for air pollution measuring equipment. Using a simple technique, we averaged the interview responses from the 20 managers within the company. Two of our key findings were that they believed they had a market share of between 60 percent and 75 percent, and that the world market was valued at just over $100 million. They identified 12 manufacturers of which they were aware.

We must admit that at about this time we were becoming discouraged. What kinds of opportunities and problems could we identify to a firm that dominated its industry? However, as often happens, our preliminary survey results showed us that the managers had overestimated their share of the market and underestimated the size of the world market.

We also discovered that the firm had made several mistakes over the years that had cost them a tremendous amount of market share and sales. The first mistake was an inability to communicate with their people in the field. The firm's management would rarely spend time on international travel, in the field talking to employees, or communicating with customers and competitors. This led to the firm's second problem - a lack of knowledge concerning its principal competitors. At the study's completion, we had identified over 69 competitive manufacturers of air pollution instrumentation that were selling into the same applications.

Certainly, the competitors we identified were not large. Many of them had less than $2 million in sales annually. However, despite their size or the quality of their products, they did contribute to the market. These firms were difficult to identify because many did not sell outside the country in which they were based. We also found that local governments and universities would use many of these local companies to supply homemade equipment to the local economy, thus reducing imports of foreign-made equipment. Many governments were installing air pollution monitoring equipment and preferred to have a local company supply it.

The next crucial error the company made was that, because the market appeared to be growing at approximately 5 percent per year (as were its sales), the company did not feel that a heavy investment in product R&D over the years to maintain market share was justified.

The opposite was in fact occurring. In the 1960s, when the firm pioneered the market, it dominated with a share of over 60 percent. However, the market was not growing at 5 percent, it was growing at 10 percent. So, by the time we began investigating the market in the early 1980s, we discovered that the firm's market share had fallen to 22 percent of the world market and that share was continuing to fall because of the lack of R&D investment in the product development cycle, as shown in Figure 3.

Figure 3 - Market Share: Perceived vs. Actual

Perceived Actual
Market Share (%) 60-75 22
Number of Competitors 12 69
Growth Rate (10-year average %) 5 10

Note: All figures are rounded. Source: Frost & Sullivan

The initial reaction to our report was one of ridicule. However, the numbers, the product literature, and the interviews were there to support our findings. Certainly, the firm could discredit some of our results, but not all. The overall trends and market information were conclusive. The company had fallen to a much lower market share than it believed, as shown in Chart 1.

The Response

  • The company shifted from a confused global strategy to a segmented geographic strategy. Each company was analyzed for competition and by customer base to determine what was needed to recapture market share.
  • A massive lobbying effort was made to national governments to convince them that the cost of purchasing a ready-made instrument was 25 percent of the cost of "reinventing the wheel."
  • R&D spending was increased to develop a complete new line of instrumentation with improved calibration options and packaging.
  • Prices were set to fit each country's market, and sales forces were restaffed to match actual market potential.
The Result
  • Sales increased faster than market growth.
  • In the wake of two years of renewed marketing investment, the company's market share is once again climbing. Five years after the launch of new products, its market share has increased to 30 percent.
  • The firm is winning large government contracts at the expense of local manufacturers.
  • There has been a fallout of almost 20 firms over the past few years in the face of increasing competition in the market.
The Moral

Any time an executive of yours says, "We've been in this industry for 20 years and we know everything about it," sell your stock.

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