How to Calculate Market Shares
by Estelle Métayer
Have you ever been in a situation where your competitor claimed a market
share that was not even close to the calculations you gave to your senior
management? Or where different people in the organization were using different
numbers? Where annual reports claimed market shares you could not retrace
in your calculations? Understanding how you can calculate - and use - market
shares can be extremely useful.
This article will discuss some of the techniques you could apply when dealing
with market share calculations:
· Why is an appropriate calculation of market share so important?
· Defining your market share according to your objectives;
· Market share calculations and pitfalls to avoid;
· How to calculate a market share when there is no data available.
Why is an appropriate calculation of market share so
As a marketing manager at Starbucks described in an excellent article about
market share in the retail world, the underlying themes typically include
any, or all, of the following:
Market potential - "How many dollars are there in this market for
Market share - "How much of the potential in the market do I capture?"
Market opportunity - "Which markets offer the greatest opportunity
But market-share calculations can also serve other purposes. They can be
Challenge common wisdom: One of my clients at an electronic firm
consistently claimed his company owned 80% of the world market in its segment.
However, we soon noticed that the accounting team, which was responsible for
maintaining the market share calculations up to date, used the following method
to arrive at their calculations:
Number of contracts won / number of contracts pursued
Because the company was only pursuing half of the total contracts available,
this measure did not portray an appropriate picture of reality - which was
that the company really owned less than 50% of the total market.
Avoid blind spots and avoid overlooking substitutes: Imagine yourself
as the marketing manager for Coca-Cola. What is your market share? Roughly
60% of the world market versus Pepsi? Not really. Management at Coca-Cola
does not only include the direct competitors into their market share (Pepsi),
they can also include soft drinks (Sprite, fruit juices, etc.) or even any
Food & Beverage product destined to cool down a dry throat. For example, they
can include ice cream. This method allows a company to include alternative
products/lifestyles to avoid a blind spot - a new trend or product arriving
in the market, such as the increase of consumption of smoothies, that would
not be tracked otherwise.
Similarly, do manufacturers of corn flakes compete only against one another?
Or do they also compete against makers of other ready-to-eat cereal? What
about hot cereal? What about bacon and eggs?
To present a common sheet to work from: In many companies, there
are a variety of market-share calculations. Accounting calculates the market
share based on revenues; the marketing department uses the number of products
sold; the strategic-planning department looks at the broad picture, etc. As
you can easily imagine, working from the same set of numbers is useful. It
will also avoid confusion and contradictory messages (annual reports, discussions
with journalists, etc.)
Defining your market share according to your objectives
In fact, market-share calculations are often "twisted" to serve political
or public relations purposes. Here are some examples:
|Purpose/objective of the market share calculation
|To include in an annual report
||Often tries to depict the company as the leader in the market
|To share with journalists
||Define your market narrowly, to increase market share
||Aircraft manufacturers' market share calculations: Boeing
only includes aircraft of a certain size into their calculations.
|To include in a sales and marketing presentation
||Define your market narrowly, to increase market share
||Sun Microsystems' announcement defining their market as the
UNIX server market and not the server market.
|To create a sense of urgency
||Include substitutes and new entrants
Market-share calculations and pitfalls to avoid
The calculation seems easy:
Products or services sold (A) / Market size (B)
However, here are some of the questions you can ask yourself:
A: Products and services sold
- Do I calculate in dollars or units?
- Do you take into account booked orders or delivered orders?
- If I calculate in dollars (or any other currency - pardon my Canadian
biases), do I compare real dollars year to year or do I adjust with inflation?
- How do I incorporate sales from subsidiaries?
B: Market size
- How do I define my market? As Ben Bidwell, who headed marketing at Ford
Motor Co., once said, "Define your market, don't let it define you."
- Do I include all countries, or only the ones where I am active?
- Do I include taxes?
- Do I include the service component?
How to obtain market share when there is no data available
- Track the number of units sold and the number of contracts awarded through
press releases and articles;
- Create a database (Excel works well usually) to add them up;
- Assuming that one is never able to track all contracts awarded, extrapolate
using what you know of the total market size
When does it work best? When your company is active in a market where
large contracts are awarded (defense, energy systems, transportation projects,
- Gather information from annual reports and company information about
the total revenue in a particular market;
- Add revenues from main players;
- Extrapolate for smaller players based on number of employees, or estimate
When does it work best? When there are few players: the aerospace industry,
for example (the size of the aircraft market can easily be obtained by looking
at Boeing and Airbus and a handful of other companies).
If your product is a consumer good:
- Go back to statistics and demographics;
- Assume a penetration percentage;
- Calculate volume in units;
- Apply price/cost per unit.
One can turn to readily available geodemographic data from vendors like
Claritas, CACI, and Applied Geographic Solutions. For a few industries, the
questions are answered through systematically obtained consumer data. IRI,
ACNielsen, and others provide scanner-based purchase data. Companies like
NPD and MRI provide consumer survey data. Other companies, such as IXI, provide
market share and account data for specific industries (in IXI's case, the
financial services industry). With few exceptions, however, the data are not
generally available at low levels of geography.
When does it work best? For consumer products.
- Select a similar market to yours (in size or in behavior);
- Extrapolate from a market you know well, or where more information is
- Adapt the number obtained for particularities of the market;
- Use as an estimate of market size, and not a precise number.
When does it work best? When the market is comparable. For example,
to understand the size of a Canadian market, use US market and divide by 10
to get a "back-of-the-envelop" average.
Linked to another market
Use the numbers from the larger market to derive size of the current one.
The market you pick will have to be directly proportional to the one you are
When does it work best? When both markets are directly proportional to
each other: for example, the size of the car seat market is closely linked
to the size of the car market.
By now, you have understood how misleading a market-share calculation can
be, and how companies can easily manipulate them. In order for you to use
them effectively, you should also write down your assumptions and make sure
you compare "apples with apples." As a result, always beware of market-research
reports which often lack explanations of how the market calculation was done.
In fact, you should almost always pick up the phone and talk to the person
who originated the calculation, to check his/her assumptions.
Estelle Métayer is president of Competia. Competia is North America's leading
consultancy and training organization for senior executives and analysts in
Strategic Planning and Competitive Intelligence. Its flagship product Competia.com is the world's largest community, portal and magazine for strategy professionals. Competia.com enables thousands of registered users to access each month a wealth of resources:
news on the advancement of their profession, practical and hands-on tools
and analysis techniques especially designed to help them increase efficiency
in their work. A former consultant at the international strategic consulting
firm McKinsey & Company, Estelle has written and lectured widely on the process
involved in turning the intelligence gained into actions. Estelle can be reached
at Estelle@competia.com .
article was originally featured at www.competia.com and is reprinted with permission. Competia Online is a production of Competia
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