How Is Market Share Calculated?

What is market share?

The sum total of the sales of any product comprises of the sales contributed by a number of businesses selling the same product, meaning each business has had its share of the total market for that product. This share or contribution of each business to sales of the same product in a given area over a definite period of time is called market share. It is easy to calculate market share of a particular company or dealer. Let’s say that the total number of cars sold by all the manufacturers in a country during one year is 10 million and if one company sells 1.3 million cars, its market share will be 13 percent. In case of small businesses it becomes rather difficult to assess their market share. Nevertheless, it is important. That’s because unless you know your share of the market, you can’t know how good or bad your business is doing as compared to your competitors. An increased sale usually means you are doing good business but if there is a drop in sales it indicates that either the market for that particular product has shrunk or your competitors are grabbing a lion’s share of that business.  Here, we’ll see how is market share calculated:

Defining the Market

For assessing a realistic market share, it is vital to first classify the market which needs to be considered. For instance, it doesn’t really help small businesses to know their share of the national market. Only that market needs to be considered that is open to that small business. One decisive factor is the geographic location of the business. Usually, operations of small businesses are confined to local cities or districts. If the business is catering to any specific clientele, it forms an important factor. For instance, a local store specializing in selling clothing for teenagers should be concerned about that market rather than the sales of the entire clothing market in that area.

How is market share calculated?

Two methods are used for calculating market share. Market share can be measured in terms of sales or number of units. For instance, a retailer selling high-end shoes may be keen to compare his sales against stores selling discount shoes. In this case it will be worth comparing on the basis of number of shoes to asses market share. Having selected the method and clearly defined the market you want to evaluate, it is essential to collect related information and data concerning business. Getting data from the market is quite difficult. So, how is market share calculated in such cases?  Fortunately, there are sources available for the purpose.  A lot of information for small businesses can be gathered from newsletters and industry publications or from statistical reports published by government agencies at federal, state or local level. Local chambers of commerce and trade organizations are also helpful for getting such information. They often suggest additional sources for gathering required information to small business owners. Once you have the required information calculating market share is very simple. Simply divide the total sales of the product (in term of units or revenue) by the sales made by your business over the same period.  Let us assume the total number of shoes sold in a particular year in a specified state or country was 600,000 while a local store sold 30,000 shoes. In this case, the market share of local store will be 30,000/600,000 X 100= 5%.

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