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:

ˇ Why is an appropriate calculation of market share so important?
ˇ Defining your market share according to your objectives;
ˇ Market share calculations and pitfalls to avoid;
ˇ How to calculate a market share when there is no data available.

Why is an appropriate calculation of market share so important?

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 my concept?"

Market share - "How much of the potential in the market do I capture?"

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

But market-share calculations can also serve other purposes. They can be used to:

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 Comments Examples
     
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

Bottom-up:

  • 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, etc.)

Players revenues:

  • 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 of revenues

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).

Demographics

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.

Similar market

  • Select a similar market to yours (in size or in behavior);
  • Extrapolate from a market you know well, or where more information is available;
  • 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 analyzing.

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.

Conclusion

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 .


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