Determining “Market Share”: A Key Strategic Management Tool

One of the most fundamental of all strategic marketing management tools, taught to just about every Business School graduate, is how to determine a company’s “positioning.” Now although the concept of business “positioning” is defined in many different ways, it basically boils down to how a company identifies and presents itself, how it attempts to create a distinct image or impression in the mind of the consumers or prospects, how it determines what are going to be its unique products or services, and how it communicates to potential prospects or customers. But that is only half the story. Positioning your company also involves determining how it differentiates itself from other competitors in the same marketplace, and what your competitors are doing to identify themselves, develop their own unique products or services, how they work to secure contracts, keep loyal customers, and how they expand to find their new “prospects” or customers.
Being aware of such key strategic business information and, more importantly, learning how to use it to your advantage, can provide a smart company with knowledge on how to achieve higher profitability and growth, how to open-up yet untapped markets, and how to become one of the leading liquid waste management companies in your area. Let’s face it, operating in a competitive marketplace requires some knowledge of your competitors, and one metric used by business strategists in order to determine how best a company can “position” itself in the marketplace with respect to their competitors is to get a firm grasp on their “market share.”

What Is Market Share?
Everyone in business talks about “market share” and knows that it is important, but how many people know what the concept of “market share” really means, what it entails, how to calculate it, and how they can best use it to their business advantage? The first thing to take note of is that determining one’s market share requires knowledge of all of your competitors in your particular servicing area. In other words, the best way to understand the success or failure of your business, your rise or drop in profits, or your gaining or losing out on bids and contracts has a lot, but not everything, to do with what and how your competitors are doing, as well as how much information you have about your competitors and their business practices and overall workload. Determining your market share gives you an indication of your overall market-competitiveness as well as serving as a measure of customers’ preference in your area for one service over similar services.
Knowledge of your overall market share at the local, state, regional, or even national levels can give you a good sense of the relative competitiveness of your company’s products or services. For example, knowing that your company is maintaining its market share is a pretty good indicator of whether its revenues are rising or falling at the same rate as the total market; i.e., at the same rate as your competitors. Likewise, a company whose market share is increasing can indicate that their revenues are increasing faster than their competitors’ revenues. There are multiple ways you can attempt to increase your market share, including innovation, strategic service placement, expanding into different demographics, lower prices, or advertising and marketing, to name a few. Knowledge of whether your company’s market share is increasing can also provide the data needed to help you determine how best to increase your scale of operations and hence improve your profitability, or even perhaps scale back your business in a particular area in order not to decrease your business operations and cash flow.
Business experts will tell you that there are basically two different calculation methods for determining a company’s market share. You can either use total units sold or contracts secured as compared to your competitors’ total units, services or contracts, or you can use overall profitability to determine your market share. For publically-traded companies and large corporations using either scale is possible because all of the business transactions and revenues need to be reported, after which the information becomes available as public knowledge. With small businesses, however, it is much more difficult to gain access to the needed information because, being private businesses, the only aspect of their business that is reported is when they file their annual tax forms with the IRS. However, there are ways that small businesses can use tax-reported income, or overall profitability, in order to calculate their market share on the whole.

How to Calculate Market Share
The first thing to do in calculating your market share is to determine the size or “space” of the market you are concerned with. In other words, are you interested in determining your company’s market share with respect to your town, municipality, region, state, or even countrywide? Next, what time periods are you concerned with: a particular month, quarter, season or annually? So, say you would like to know your company’s market share relative to its position in your region last year, in order to project next year’s market position and business plan. First, figure out the total amount of profit your company made in that year. Then, gather knowledge of what the total amount of profit was which was generated by all companies operating in your particular line of work, in your region, in the last year. The next step would be to divide your company’s total profits by the total profits of all like companies. It is crucial that you delimit the same time period or area when collecting your information and doing your calculations so you can be sure you are comparing apples to apples and not apples to oranges.
Here is the well-known formula for calculating revenue market share:

Your company’s total sales revenue during time period X
________________________________________________________ X 100 = Market Share
The combined total sales revenue of every
Similar company in the marketplace

So, for example, if you claimed a profit of $500,000 in a given year, and the total sales reported by every company in your line of business during that same exact time is and in the same exact region was $5 million, your market share is 500000/5000000 X 100 = 10%

A more formal way to express the formula is:

Revenue market share (%) = 100 x Your Sales Revenue ($) / Total Market Sales Revenue($)

In the above example, the calculation tells you that your company commands 10% of the market. That is a low figure of course. If you change the market “space” you might come up with larger or smaller overall percentages of your market share. In other words, you could do the same calculations following the same method, but instead of using the “region” metric, you can choose a different “space” like a particular municipality where you find much of your business happens to occur. Plus, calculating your market share can provide you with the knowledge of where your competitors are strong and you are weak, and with this knowledge you will know exactly where to focus your energy in terms of contract bidding or advertising. With access to the right data, you could even calculate your market share vis-à-vis a single competitor of yours.
The next question is: How do I gain access to the data I need in order to calculate my market share? One way would be to hire a market research firm that specializes in comparative business statistics and information. Another way is to do it yourself. There are sites on the Internet where you can gain access to the appropriate data, some are free but some come with a fee. You can find the website addresses of business information specialists below in the “Resources” section.
Hoover’s Inc., a Dun & Bradstreet company has perhaps the largest data base on businesses nationwide. They have detailed data on thousands of companies. You can contact Mr. Alex McElroy, a business information consultant with Hoovers through email: amcelroy@hoovers.com , or by phone: 513-830-9793. Alex will be glad to help you; he will walk you through the entire process and show you how to take advantage of one of the largest business information data bases out there. An initial consult is free. It is important to keep in mind, however, that the information you collect can only provide you with a rough estimate of your market share. One reason is that companies do not always report, or have to report to the IRS, every dollar that they make. And, since you are calculating your market share based on the reported income of yours and all of your competitors’ reported income, data on market share can only provide you with a ballpark figure of how strong or weak your company may be relative to your chosen time metric (monthly, quarterly, annually, etc) or “space” metric (town, city, municipality, county, region, etc.).

The Benefits of Keeping Track of Your Market Share
What do you do with the information once you have done your research and have computed the calculations? Say you calculate your market share in 5 different counties that your business serves and you end up with: 40%, 28%, 19%, 63%, and 26%. With this hypothetical example you see that there is one county (i.e., your market share is 63%) where you have already established yourself and may have even developed a core of loyal customers. Knowing where your business is most secure and profitable tells you that you may not need to focus on that particular area at least for the up-coming business year because your business is already well established in that particular area. Armed with the appropriate data, the strategic business management decision, for example, would tell you that there are certain counties (i.e., the ones where your market share is only 19% and 28%) in which you should focus your contract bidding efforts, marketing campaigns and advertising. Armed with market share data, you could devise a marketing strategy that focuses on the counties where your company is under –represented. Keeping track of your market share will also enable you to evaluate overall trends in total market growth or decline, as well as patterns in customers’ selection among you and your competitors. It can also indicate losses in market share, which may indicate long-term problems for your company. Knowing this you could proactively devise strategic adjustments either in your business practices or your advertising and marketing schemes in order to correct downward trends in your market share where your presence is particularly weak.
Operating a small business in a competitive market has many challenges, but having a rough estimate of your market share, and using it to your advantage, will supply you with the tools you need to increase your ability to negotiate prices and sales terms with buyers, suppliers, and clients. Knowledge of your company’s market share indicates a measure of your overall business performance and strategically using the knowledge gained from your market share metric could go far in establishing better advertising and marketing strategies, and better business planning and forecasting.

Story by Mark Joseph Manion

RESOURCES:
www.bizstats.com
www.bvmarketdata.com
www.bizbuysell.com
www.globalbx.com
www.inc.com
www.boundless.com
www.hoovers.com
www.investopedia.com

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