Market Share Basics This module covers the concepts of unit market share, revenue market share, market penetration, relative market share, and market concentration. Authors: Paul Farris and Stu James Marketing Metrics Reference: Chapter 2 © 2011 Paul Farris, Stu James, and Management by the Numbers, Inc.

What is a Market? Market Share Before discussing market share, let’s discuss the non- trivial issue of market definition. A good first step is to define the served market in terms of dimensions such as geography, demographic, channel, time periods, etc. Examples: Brazilian drivers aged 20-39 in 2010 Purchasers of cold medicine at grocery stores in May Spring tourists in Paris who plan to visit a museum Insight To illustrate why market definition is essential, consider the difference between the definition of tourists visiting Paris who plan to visit a museum and tourists just visiting Paris. In effect, are we competing against museums or any potential tourist activity? MBTN | Management by the Numbers

What is a Market? Market Share Market definition with regard to market share can be applied in many different contexts – goods, services, segments, regions, channels, units, dollars, etc. What is essential to remember is that when calculating market share, one must compare apples with apples. Otherwise it is at best meaningless, or more likely, misleading and dangerous. With that in mind, let’s turn to market share – why it is one of the most important metrics in business and how to calculate it. MBTN | Management by the Numbers

Market Share Market Share Market Share is one of the fundamental measures used in marketing. It measures the sales of a brand or product relative to the overall size of a market. Market Share may be calculated using units or revenues, and both measures may have important implications for a company. Note that the difference between the two measures is price, as Revenues = Units Sold x Price. Definition Unit Market Share = Unit Sales / Total Market Unit Sales Definition Revenue Market Share = Sales Revenue / Total Market Sales Revenue MBTN | Management by the Numbers

Why is Market Share Important? Market Share is an indicator of how a brand is doing relative to the competition. It includes not only a customer’s assessment of a brand’s value proposition, but also other factors that influence sales such as advertising and distribution. Unit sales relative to competition also may have an impact on unit costs if higher volumes of production lead to lower production costs. This may provide a competitive advantage to a company. Insight If a company has a higher revenue market share than unit market share it means they have a higher price relative to the competition. MBTN | Management by the Numbers

Market Share and Market Penetration It is important to note that market share calculations only consider actual sales, not potential customers who ultimately decided against purchasing. This introduces the concept of market penetration which considers the total population of a market. Low rates of market penetration may indicate unmet potential demand for products or low interest in the product category as a whole within the selected population. Definition Market Penetration = Customers who purchased a product in the category Total population MBTN | Management by the Numbers

Relative Market Share Relative Market Share Relative market share indexes a firm’s or brand’s market share against its leading competitor. This provides managers with a measure to compare the relative market positions of their brands across markets. Definition Relative Market Share = Note that this is equivalent to Brand Sales / Largest Competitor Sales Brand’s Market Share ($ or Units) Largest Competitor’s Market Share ($ or Units) Insight In some markets 20% market share might be a leading market position. In others it might be a distant #2 or even #3. Relative market share provides this additional dimension of analysis. MBTN | Management by the Numbers

Relative Market Share and the BCG Matrix The relative market share metric was further popularized in the 1960s by the Boston Consulting Group in its famous growth – share matrix, where relative market share is a surrogate for competitive strength. The other axis, market growth rate, is a surrogate for market attractiveness and potential. While there are many issues with the use of the BCG Matrix, it remains a popular visual representation of a firm’s brands, partially because of its simplicity. Author: Ericmelse. From Wikipedia Commons. MBTN | Management by the Numbers

Relative Market Share Insight Note that sometimes relative market share will be calculated as an index value from 0 to 1, where 0 is a brand with no sales in the market and 1 is the brand with the highest market share. This is the same as the previous definition except for the leading brand. For example, if Brand A has 50% market share and Brand B has 25% market share. Brand A’s relative market share will be 2.0 using the first definition, but only 1.0 using the second definition. Insight In case you’re curious about why marketers would define relative market share in this way, it is sometimes thought to give insight into the relative cost and pricing power of a brand. If your relative share is very small, your costs might be higher and your pricing power with customers, lower. MBTN | Management by the Numbers

Market Concentration Market Concentration Market concentration is the degree to which a relatively small number of firms accounts for a large proportion of the market. Definition 3 or 4 Firm Concentration Ratio = Sum of the market shares of the leading 3 or 4 competitors in a market Question: Which graphic represents the more highly concentrated market based on three firm concentration ratio? Answer: The bottom graphic. It represents a concentration ratio of 100% and the top graphic is less (approx. 60%) MBTN | Management by the Numbers

Market Share Sample Problem Market Share: Sample Problem Set Market Share Sample Problem A high growth market in Eastern Europe has the following five brands competing in two regions (yearly sales). Total Units Revenues (South) (West) Alfa € 9,000 200 250 Boffo € 15,000 100 Cafav € 6,000 150 Defy Efizz € 14,000 350 € 50,000 1000 Questions: What is Alpha’s unit market share in the West ? What is Defy’s revenue market share? What is Efizz’s combined unit market share? What is Alpha’s price? MBTN | Management by the Numbers

Market Share Sample Problem Market Share: Sample Problem Set Market Share Sample Problem Total Units Revenues (South) (West) Alfa € 9,000 200 250 Boffo € 15,000 100 Cafav € 6,000 150 Defy Efizz € 14,000 350 € 50,000 1000 Answers: Alpha’s unit share in West = 250 / 1000 = 25% Defy’s revenue market share = 6000 / 50000 = 12% Efizz’s combined unit market share = (350 + 350) / 2000 = 35% Alpha’s price = 9000 / (200 + 250) = 20 MBTN | Management by the Numbers

Market Share Sample Problem Market Share: Sample Problem Set Market Share Sample Problem A high growth market in Eastern Europe has the following five brands competing in two regions (yearly sales). Total Units Revenues (South) (West) Alfa € 9,000 200 250 Boffo € 15,000 100 Cafav € 6,000 150 Defy Efizz € 14,000 350 € 50,000 1000 Questions: What is Cafav’s relative market share (units)? What is Boffo’s relative market share (revenues)? What is the 3 firm market concentration in the south? What is the 4 firm concentration ratio (revenues)? MBTN | Management by the Numbers

Market Share Sample Problem Market Share: Sample Problem Set Market Share Sample Problem Total Units Revenues (South) (West) Alfa € 9,000 200 250 Boffo € 15,000 100 Cafav € 6,000 150 Defy Efizz € 14,000 350 € 50,000 1000 Answers: Cafav’s relative market share (units) = 7.5% / 35% = .214 Boffo’s relative share (revenues) = 30% / 28% = 1.07 (Note: or 1.00 using alternative measure of RMS) 3 firm market concentration in south = 35%+20%+20% = 75% 4 firm concentration (revenues) = 30%+28%+18%+12% = 88% MBTN | Management by the Numbers

Market Share Sample Problem Market Share: Sample Problem Set Market Share Sample Problem A high growth market in Eastern Europe has the following five brands competing in two regions (yearly sales). Total Units Revenues (South) (West) Alfa € 9,000 200 250 Boffo € 15,000 100 Cafav € 6,000 150 Defy Efizz € 14,000 350 € 50,000 1000 Questions: If the potential market in the South is 2000 customers and the potential market in the West is 5000 customers, what are the respective market penetration rates for this product category (presume 1 purchase / customer). MBTN | Management by the Numbers

Market Share Sample Problem Market Share: Sample Problem Set Market Share Sample Problem Total Units Revenues (South) (West) Alfa € 9,000 200 250 Boffo € 15,000 100 Cafav € 6,000 150 Defy Efizz € 14,000 350 € 50,000 1000 Answers: Market penetration in South = 1000 / 2000 = 50% Market penetration in West = 1000 / 5000 = 20% Overall market penetration = 2000 / 7000 = 28.6% MBTN | Management by the Numbers

Market Share – Further Reference Marketing Metrics by Farris, Bendle, Pfeifer and Reibstein, 2nd edition, pages 32-43. - And - Market Share Metrics (advanced MBTN module). This module provides further insight into the decomposition of market share and metrics that are essential to understanding what circumstances led to a particular level of market share. MBTN | Management by the Numbers