Of course, in order to be successful as an entrepreneur, you also need your place in the market. In today’s globalized world in particular, it is important to assert oneself there and act profitably. That is why it is important for you to always develop new strategies in order to secure your market share . But what role does market share really play for your company?
What does market share mean?
The term market share defines a key figure that is used to determine what proportion of both sales and sales you can book on the entire market. The market share is measured as a percentage of the total value or your output of a market as a currency indicator . The market share is correct according to the sales volume or the sales revenue at a very specific point in time.
How important is the market share for you?
For you as an entrepreneur, the market share represents a measure of the importance you have as a provider of a product or service in a certain market segment . You can also classify the market share as a quantity, which indicates how things are going with a possible long-term success of your company. The market share shows you how strong your company is compared to your competitors. The bigger your market share, the better it is for you. The market share is to be determined both as a key figure for the sales market and for the procurement market and you can determine it in terms of quantity or value.
What types of market share do you need to know?
You have to know and differentiate between the types of relative and absolute market share. In the case of absolute market share, you are talking about the share of turnover or sales of your product or service in the respective overall market. As an entrepreneur, you consider the relative market share of your own turnover or your sales in comparison to your strongest competitor.
This comparison is limited to a specific performance period and to the same market.
How can you calculate the market share?
One of your constant tasks as an entrepreneur is to keep an eye on the market and react to changes. To do this, you have to calculate your market share, among other things .
Calculation of absolute market share
When calculating the absolute market share, you have to take the total market volume as a basis. You work with a formula that looks like this.
Absolute market share = own sales / sales: total sales / total sales x 100
To illustrate this exactly, let’s assume as an example that you sell a very specific piece of software. Last year you made a turnover of 20 million euros with it. The total volume on the market for this product is 400 million euros. This means that your calculation for absolute market share looks like this.
Absolute market share in percent = 20 million euros: 400 million euros x 100 = 5%
However, relying solely on this metric for absolute market share is not enough for you. It is the only key figure that is not meaningful enough. Especially not if you are active in a polypolistic market . This is a market form in which there are many providers of this software and all of them have only a small market share. This means that in this case you could already be the market leader with the 5% from the example if the others are all below this value. For you, this means that you definitely have to calculate the relative market share as well.
Calculation of relative market share
With the relative market share you do not compare the turnover or sales of your company with the entire market. Your biggest competitor provides you with the benchmark. If you are possibly a market leader, then you need to look at the best competitor when calculating relative market share. Again, you work with a formula that looks like this.
Relative market share = own sales / sales: sales / sales of strongest competition x 100
As an example, let’s assume that your market share is the same as that of your competitor. That would mean that the relative market share is 100%. But if this value is below 100% for you, then your competitor is better than you. If it is above this value, then you are the market leader. Let’s stay with the example from above with the special software and insert the values into the formula under the view that your competitor makes twice as much sales, i.e. 40 million.
Relative market share in% = 20 million euros: 40 million = 50%
What do you understand by a dominant position?
In addition to its meaning for you as a key figure, the market share is also a legal term from antitrust law . The market share serves as an important factor and indicator for an existing market power. If the market position of a company is considered in relation to its competitors, then the market share is used as an important criterion. There is always the suspicion that a market share of at least 40 percent is in a dominant position. This assumption can of course also be refuted at any time. From a market share of 50 percent , there is no longer any suspicion, but is considered a clear dominant position. In any case, this is how the case law of the ECJ sees it. Such companies are under special observation and certain types of behavior are prohibited by these companies.
How can you use the market share for your marketing planning?
The market share is also an important parameter for your strategic marketing planning. In order to allow turnover or sales to grow optimally, you first have to exploit the market potential. This can be the maintenance of market shares, but also the expansion of market shares. If you get stuck here and you can no longer achieve a certain market share, you need a new strategic alignment of your marketing planning.
- Create sales potential in new markets. This applies to regional, national and international markets.
- Developing specific offers for new target groups, for example by varying the product group
- Look for new uses for your products or services and enter additional markets
Of course, you can also secure or expand your market share if you bring completely new products to the market.
- Bringing innovative products to market that were previously not on offer.
- Develop new products that are better than previous products.
- Expansion of your range of products or services
In a nutshell: frequently asked questions about market share
What is the absolute market share?
The absolute market share defines an absolute turnover or sales of a company compared to the total market volume. The absolute market share can be measured in units of value or quantity.
How do you calculate the market share?
If a company that sells software has an annual turnover of 20 million euros and the total market volume is 400 million euros, then this company’s market share is 5%.
When do you speak of a market leader?
A market leader is a company that has the largest market share in terms of turnover or sales in the relevant market in comparison with all other competitors. If this also applies globally, then we speak of the world market leader.
The market share is a business indicator. The market share shows how high a company’s share of the overall market is. A distinction is made between the absolute and the relative market share. With the absolute market share, your own values are compared with the overall market. With the relative market share, you compare your turnover or sales in relation to your strongest competitor in the market.