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What does market share mean? How do you calculate market share?
According to William M. Luther, market share is the percentage of sales earned by a specific company. He explains how to calculate market share in his book The Marketing Plan.
Keep reading to learn the meaning of market share and Luther’s advice on acquiring market shares.
Market Share Meaning
What does market share mean? Luther defines it as the percentage of a target market’s total sales generated by a business. You should aim to acquire at least 30 to 50% of your target market to guarantee long-term profits. If you acquire less than 30% of the market, you’re unlikely to make enough revenue to get ahead of your competition and maintain your position. If you attempt to acquire more than 50% of the market, your costs to achieve this may outweigh the amount of profit you can make.
(Shortform note: It’s difficult to confirm whether acquiring 30 to 50% market share guarantees long-term profits. This is because, as Luther states, these profits depend on the size of the market. They also depend on the production cost of your product or service and the price you charge for it. For example, your product costs $10 to produce and your market size totals 1,000 customers. If you price your product at $15, a 30% share won’t generate high profits. On the other hand, if you price your product at $500, you’ll generate substantial profits. We’ll delve deeper into this topic at the end of this section.)
Luther explains that if you acquire at least a 30% market share, you’ll benefit from reduced costs that strengthen your position in the market. This is because business costs fluctuate in proportion to the volume of products and services produced. The more you produce to fulfill customer demand, the more resources you purchase in bulk, and the less you pay per unit.
This results in savings that you can allocate toward improving business operations—which means you can provide better-quality products and services and more effective customer service than the competition. These savings also mean that you can afford to charge lower prices for your products and services, because they reduce your reliance on profits to sustain your business.
Calculate Your Market Share Objective
(Shortform note: There are multiple ways to measure your market share. For instance, you could measure your share based on how many customers you serve. You can also measure it based on your revenue compared to the total sales in your market segment. The calculation we offer below is one of the most useful and straightforward ways to calculate market share.)
Calculate your current market share by dividing how many customers you serve in this market by the total number of customers in the market. Then multiply the result by 100.
For example, the market size for your tooth whitening product is 100,000. You serve 1,000 customers. You calculate your market share as follows: (1,000 ÷ 100,000) x 100 = 1% market share. This means that your competitors control 99% of your target market.
To acquire 30 to 50% of the market as Luther suggests, figure out the total number of customers you’ll need to serve to achieve this. For example, for your tooth whitening product, 30% of 100,000 = 30,000 customers.
Businesses With Low Market Shares Can Achieve Long-Term Success
Business experts confirm Luther’s argument that businesses with high market shares enjoy many advantages, such as more bargaining power with suppliers, economies of scale, and operational efficiency—resulting in lower costs and higher profits. These profits allow them to outperform the competition and maintain their market position.
However, there is a limit to how low businesses can bring their costs down—hence why Luther advises against acquiring more than 50% of the market. After a certain point, the costs spent on outperforming the competition to acquire market share will outweigh the savings made from acquiring them, resulting in minimal profits.
Unfortunately, it’s simply not possible for every business to acquire high market shares. Since each market can only accommodate three high-share businesses (assuming they each hold 33% of the market). Further, many businesses entering large markets won’t have the resources to fulfill customer demand at this level. So, does this mean that they should just give up on their product or service?
According to marketplace studies, even though there is a clear correlation between market size, market share, and profitability, low-share businesses can still achieve long-term success and profitability. However, their success is reliant on the following three conditions:
- The market’s growth rate is less than one percent: Low-growth markets benefit from less competition. This creates a more stable environment for businesses to define and protect their positions in the market.
- Consumers don’t expect continual upgrades: Markets in which the products or operational processes remain consistent allow low-share businesses to avoid the high costs associated with accommodating innovative trends.
- Businesses don’t offer customization or additional services: To keep operational costs to a minimum, low-share businesses focus on delivering standardized products that don’t require subsequent servicing or technical support.
If you don’t have the resources to acquire at least 30% of your intended market as Luther suggests, consider how you can tailor your offer to fit in with these three conditions.
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- How to build a team and motivate them to work together
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