Business analysts are constantly looking for a way to outperform the market. As a result, dozens of methods have been created to evaluate companies, and new strategies are always on the horizon. Often this leaves behind some measures that are traditional, but still able to provide essential information about the strength of a company. One such tool is market share, and understanding how to calculate it can help you determine a company's performance. When applied correctly, this method can offer valuable insights into a company's future prospects.
Steps
Part 1 of 3: Calculating the Market Share
Step 1. Determine the period you want to review for each business you are analyzing
To make sure you're making a fair comparison, you need to evaluate sales over a specific time frame. You can analyze those that occurred over a quarter, a year or several years.
Step 2. Calculate the firm's total revenue (also called total sales)
All publicly traded companies are required to release quarterly or annual financial statements, which include a record of all of the firm's sales. These documents may also include a detailed explanation of sales of specific types of products or services in the footnotes.
If the business you are analyzing sells a large assortment of products and services, it may not be helpful to simply examine all sources of business revenue by putting them all in the same cauldron. Look for information regarding sales of particular types of products or services
Step 3. Look for total market sales
This is the total sum of sales (or revenue) acquired on the entire market.
- The total sum of market sales can be found from industry associations or publicly available research reports. For a fee, organizations such as the NPD Group provide specific sales information in a variety of domestic and international market segments.
- Alternatively, you can add up the sales of the largest companies on the market for a certain product or service. If some firms dominate the market, while smaller firms are making insignificant sales (such as in the home appliance or automobile sector), calculate the total revenue of all the companies to get the sum of the sector's total sales.
Step 4. Divide the sum of the total revenue of the firm you are analyzing by the total sales of the entire industry on the market
The result of this division results in the specific market share of the company you are evaluating. So, if a company made € 1 million by selling a certain product and all the companies in the industry made a total of € 15 million, you should divide 1 million by 15 million (1,000,000 / 15,000,000).) to determine the market share of the specific firm.
Some prefer that the market share is represented by a percentage, while others do not reduce it even to the minimum terms (leaving the total at 40 million / 115 million, for example). The shape you prefer is irrelevant, the important thing is to understand what this figure represents
Part 2 of 3: Understanding the Role of Market Share
Step 1. Try to understand a firm's market strategy
All companies offer unique products and services and sell them at different price levels. Their goal is to attract specific customers who will allow the firm to maximize profits. A large market share, whether measured in units sold or total revenue, does not always indicate high profitability. For example, in 2011 General Motors' market share was 19.4%, 6 times larger than BMW's, or 2.82%. Over the same period, GM posted profits of 9.2 billion euros, while BMW reported profits of around 4.9 billion euros. Whether measured by unit sales or total revenue, BMW has demonstrated a higher level of profitability than GM. Profit per unit, not just market share, is the goal of most businesses.
Step 2. Define the market parameters
Firms seek to occupy the highest market share available and compatible with their strategy. Taking up the automotive industry example again, BMW knows that not all car buyers should be considered potential customers. It is a manufacturer of luxury cars, and this market is made up of less than 10% of car buyers. The sale of luxury cars makes up a tiny fraction of the total cars bought annually in the United States (12.7 million). 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 analyze. It can be general, so you decide to focus on total sales, or limited to specific products and services. When evaluating the sales of each firm, you must define the market in similar terms for each exam, otherwise you will not make fair comparisons
Step 3. Identify changes in market share year after year
You can compare the performance of a single firm over the years. Alternatively, you can compare all the companies that fall into a competitive space. Alterations in market share could indicate that a firm's strategy is effective (if market share increases), flawed (if market share decreases), or not implemented efficiently. For example, the number of cars sold by BMW and their market share have increased since 2010. This indicates that market and pricing strategies have been more effective than competitors such as Lexus, Mercedes and Acura.
Part 3 of 3: Understanding the Strengths and Limits of Market Share
Step 1. Try to understand the information that market share can reveal about a business
Market share is not a comprehensive tool that lets you know everything you need. Instead, it is more of a method of initiating an initial analysis. If you use it as an indicator of business value, you need to understand both the strengths and limitations of this tool.
- Market share is a valuable tool for comparing two or more similar firms competing in a market. While this isn't exactly a measure of a business's popularity, it does demonstrate the degree to which a company's product beats others (or doesn't hold up to comparison).
- Consequently, market share can indicate the probabilities of a firm's growth. If a company has reported an increase in market share for several consecutive quarters, it has clearly figured out how to make or sell a particularly desirable product. Firms with a smaller market share could suffer from the exact opposite situation.
Step 2. Understand the limits of the market share indicator
As stated earlier, market share is a limited tool that can help you develop an initial perception of a business. Taken alone, it means little.
- Total revenue, which is the only factor used to determine market share, provides little information about a firm's profitability. If one company has a larger share of the market, but makes a substantially lower profit (the profit is calculated by subtracting the total cost of production from the revenue) of another, the market share becomes a significantly less significant indicator of its success. current or future.
- Market share may indicate more information about the market than about the firm you are evaluating. Some markets have been consistently dominated by a single firm or a small group of firms, and few noticeable changes have occurred over the course of many years. The power of an entrenched monopoly can be nearly impossible for other companies to break, so an examination of market share will only prove this fact. However, small businesses may still carve out a niche for themselves, and it will still be possible to have high profitability.
Step 3. Consider your investment strategy in light of market share
The degree to which a business leads the market or struggles to get ahead should have an impact on your perception.
- It may not be worth investing in companies that have not shown growth in market share for years.
- Companies with growing market share are worth keeping an eye on. Unless they are poorly managed and unprofitable (even this information can be determined by examining all public financial records of a publicly traded firm), the value of the company is likely to grow.
- Firms with declining market share could be in trouble. It is not the only factor to consider in determining this, but, if the company is also having diminishing profits or has no upcoming offers of new products or services, it should be avoided.
