How to Calculate Market Share

Understand a company's market strategy. All companies make their products and services unique and offer them at different price levels. Their aim is to capture the specific customers that will enable the company to maximize profit. Large market share, whether measured in units sold or total revenues, does not always correlate with high profitability. For example, the market share of General Motors in 2011 was 19.4%, more than 6 times the share of BMW at 2.82%. GM reported profits of $9.2 billion while BMW reported profits of about $4.9 billion Euros ($5.3 billion U.S.) during the same period. Whether measured by per unit sales or total revenue, BMW showed a higher degree of profitability than GM. Profit per unit, not just market share, is the goal of most companies.^{[6] [7]}

Define the market parameters. Companies seek to capture as much market share as might be available consistent with their strategy. To again use the automotive example, BMW knows that not every car purchaser is one of its potential customers. It is a luxury car manufacturer, and less than ten percent of car buyers are in the luxury car market. Luxury car sales make up a tiny fraction of the total 12.7 million cars purchased annually in the US. BMW sold 247,907 cars in 2011, more than any other luxury car maker including GM's Cadillac and Buick lines.

• Clearly identify the specific market segment you intend to research. It can be general, focusing on total sales, or restricted to specific products and services. You must define the market on like terms as you examine the sales of each company. Otherwise, you are comparing apples to oranges.

Identify changes in market share year to year. You can compare a single company's year-to-year performance. Alternatively, you can compare all the companies within a competitive space. Changes in market share might mean the company's strategy is effective (if market share is rising), faulty (if market share falls), or was not implemented effectively. For example, BMW's number of autos sold and their market share increased from 2010. This indicates that their marketing and pricing strategies were more effective than competitors like Lexus, Mercedes, and Acura.^[8]

Understand what market share can demonstrate about a business. Market share is not an end-all tool that tells you everything you must know; quite the opposite, it is more of a tool of initial inquiry. You must understand both the strengths and limitations of it as an indicator of value.^[9]

• Market share is a good tool to use to compare two or more similar companies that compete against each other in a market. Though not exactly a popularity contest, it does demonstrate the extent to which one firm's product out-competes (or fails to compete against) the rest of the field.
• Consequently, market share can indicate likelihood of a firm's growth. If a firm has claimed increasing market share for several consecutive quarters, they have clearly figured out how to manufacture or market an especially desirable product. Companies that are losing market share may be suffering from just the opposite.^[10]

Comprehend the limitations of the market share indicator. As noted above, market share is a limited tool that can help you develop an initial perception of a firm. Taken by itself, it means little.

• Total revenues--the sole factor used to determine market share--provide little information about the profitability to a company. If one company holds a larger portion of the market but makes substantially smaller profit (revenue minus expenses) than another, market share becomes a substantially less significant indicator of current or future success.
• The market share may indicate more about the market than the company you are evaluating. Some markets have been consistently dominated by a single or small group of companies, and little perceivable change has taken place over the course of many years. The power of an entrenched monopoly can be almost impossible for other companies to break, and so an examination of market share will only demonstrate that fact. However, small firms may still successfully carve out a niche for themselves, and profitability is still possible.^[11]