Last Updated on September 23, 2023 by BFSLTeam BFSLTeam
Fundamental analysis is a concept that you need to be thoroughly aware of before investing in any stock. It is a series of techniques that enable you to determine whether a stock is undervalued or overvalued. In addition to helping you find undervalued and overvalued stocks, fundamental analysis also gives you a host of other information about a company such as its future growth prospects and its market share. Although it might seem like a relatively unimportant piece of information, knowing the market share of a company is crucial to determining the nature of hold and dominance it has over the industry.
If you’re wondering about the meaning of market share and how it is calculated, here’s a comprehensive guide that may be able to help you out.
Also Read: What is PE in the Share Market?
Table of Content
Market share is a term that represents the percentage share of a company in the sales or revenue of an industry. The greater the percentage share of a company, the higher its market share is. Companies with large market shares are often referred to as industry leaders since they have the power to shape the industry.
Unlike other metrics, market share is dynamic, meaning that it changes periodically. This is precisely why market experts calculate the market share of companies regularly at set periodic intervals.
Also Read: Authorized Share Capital
Calculation: An Example
Now that you’re aware of the definition of market share, let’s take a look at how it is calculated. To quickly arrive at the share of a company in an industry, all you need to do is use the simple mathematical formula mentioned below.
| Market Share = (Individual Company’s Business Revenue ÷ Total Industry Revenue) x 100 |
Here’s a hypothetical example to help you better understand market share calculation.
Assume that the shoe manufacturing industry has 3 major manufacturing entities – A, B and C. The total revenue from the industry for the previous financial year (2022 – 2023) stood at ₹20 lakhs. You wish to find out the market share of entity B, whose individual revenue for the same period stood at ₹12 lakhs.
Now, applying the above-mentioned formula, you get the market share of entity B.
Market share of entity B = 60% [(₹12 lakhs ÷ ₹20 lakhs) x 100]
As you can see, with a 60% market share entity B is leading the shoe manufacturing industry.
Knowing how to calculate the market share of a company is important. However, it is equally important to know where a company stands relative to its competition. This can give you a better overall picture. Here’s where relative market share comes into the picture.
Relative market share is a term that’s used to represent the percentage share of a company in the sales and revenue of an industry relative to the industry’s leaders. To put it simply, the metric essentially compares the share of a company with its leaders.
Relative market share calculation is very easy. All you need to do is divide a company’s market share percentage by the market share percentage of the largest industry leader and multiply the resulting figure by 100. Here’s a quick look at the formula used to calculate relative market share.
| Relative Market Share = (Company’s Market Share % ÷ Industry Leader’s Market Share %) x 100 |
For the sake of continuity, let’s use the same example for the relative market share calculation as well.
As you’ve already seen, the shoe manufacturing industry in the previous example has 3 major manufacturing entities – A, B and C. The total revenue from the industry for the previous financial year (2022 – 2023) was ₹20 lakhs. The total revenue and market share percentages of all three entities are listed below.
| Entity | Revenue (2022 – 2023) | Market Share Percentage |
| A | ₹5 lakhs | 25% |
| B | ₹12 lakhs | 60% |
| C | ₹3 lakhs | 15% |
Now, to find out the relative market share of entity A, all you need to do is substitute the market share percentages listed above in the respective formula.
Relative market share of entity A = 41.66% [(25% ÷ 60%) x 100]
This means that entity A owns a market share of 41.66% relative to the biggest industry leader, entity B.
A company’s market share is never fixed, even if the company is a leader. There are many factors that can significantly impact market shares. As an investor, you need to be aware of what they are. Let’s take a quick look at some key factors that can cause a shift in the market share.
- Pricing
The pricing of products and services is one of the primary movers of market share. A company that prices its offerings attractively is likely to witness positive growth in its industry share, whereas a company with high prices is unlikely to become a market leader.
- Innovation
Innovation in the form of better and more efficient manufacturing technology and new offerings can lead to a paradigm shift in the market share. A company that innovates consistently is likely to enjoy a higher market share than a company that’s relatively stagnant.
- Mergers and Acquisitions
One major and often preferred way to increase market share is through a merger or an acquisition. When two companies merge or one acquires another, the merging or acquiring entity automatically takes over the market share of the other entity. Many companies use this tactic to consolidate and strengthen their position in the industry.
- Brand Awareness
The more aware consumers are about your brand, the more the market share is likely to be. This is precisely why many leading companies often spend a lot of money to advertise and market their brands and offerings.
- Customer Loyalty
A company that takes steps to ensure customer loyalty through various incentives will most likely witness a rise in its market share. Focusing on loyalty programs will help companies retain their market share and may also attract new customers.
Additional Read: What are the Factors Affecting Share Prices?
Conclusion
Being aware of the market share of a company can help you assess its investment prospects in a better manner. The greater the market share of a company, the stronger its position in the industry. That said, reading too much into the market share may not always give you a clear picture. It is also equally important to look at a company’s share relative to its peers. Relative market share calculation can help you in this regard and is more likely to give you a clearer picture of where the entity stands.
