Jun 18, 2008
How to calculate market shares?
by Bi3ard
One company's market share is integral when you are looking to invest in a company. Market share calculation can often be misleading and companies can easily manipulate it.
Market share is the percentage a company has of an overall market.
For instance, if they sell "widgets," market share will tell you what percentage of all "widgets" made in the world they sell. If a company is growing market share, that is positive. Losing market share in the other hand is negative.
Why is calculation of market shares so important?
Calculation of market share is important to give the clear image if the company’s market share has the growing tendency or it should be avoided because it has negative trend.
To get precise answer, it’s the best to answer on three important questions
- Market potential - "How many dollars are there in this market for my concept?"
- Market share - "How much of the potential in the market do I capture?"
- Market opportunity - "Which markets offer the greatest opportunity for growth?"
Also, after that ask yourself few useful questions about Products or services sold and Market size.
Products and services sold
- Do I calculate in dollars or units?
- Do you take into account booked orders or delivered orders?
- If I calculate in dollars (or any other currency - pardon my Canadian biases), do I compare real dollars year to year or do I adjust with inflation?
- How do I incorporate sales from subsidiaries?
Market size
- How do I define my market? As Ben Bidwell, who headed marketing at Ford Motor Co., once said, "Define your market, don't let it define you."
- Do I include all countries or only the ones where I am active?
- Do I include taxes?
- Do I include the service component?
After determining your priorities, you can proceed to define your market and calculate market shares.
It can be done through few steps:
First you have to define your market before you can calculate anything, including shares. This means that the sales of one big company are a much smaller wedge than sales of its products. So, basically try to specify the market you are trying to calculate first.
Second, search for the total number of items sold in your market. Few sites like Thestreet.com or Yahoo! Finance are great places to learn sales figures of large corporations. You simply have to look at their quarterly and yearly findings about the product(s) you are interested in. For instance, if you look for Apple check the number of how many iPods and iPhones the company has sold, how many has intention to manufacture, to expand, etc. Of course, don’t forget to find the number for every company that competes in the space in your market.
Your next step should be dividing the number of units that your company (or the company that you are interested in precisely) has sold by the number of total units in the space.
Next, you should calculate the percentage of market share. The most simple equation would be if your company for example sold 10 widgets and the industry sold 100 widgets in total. It’s easy then to calculate that your company would have a 10 percent of market share. Include numbers you’ve got in previous steps and you should be sure about your shares and was your investment wise. But that kind of evaluation can be done after the last step.
In the last step, you should determine if the market share is growing or shrinking. Earnings coupled with a growth for sure propel a stock higher. So basically if your company is gaining market share over competitors in a so called hot market, then it may make it an attractive investment. You should always consult your broker or do your own due diligence before buying. Conversely if it is losing market share, then you might want to look at the competitor who is stealing it.
Also, don’t overlook this:
How to obtain market share when there is no data available Bottom-up:
- Track the number of units sold and the number of contracts awarded through press releases and articles;
- Create a database (Excel works well usually) to add them up;
- Assuming that one is never able to track all contracts awarded, extrapolate using what you know of the total market size
Player’s revenues:
- Gather information from annual reports and company information about the total revenue in a particular market;
- Add revenues from main players;
- Extrapolate for smaller players based on number of employees, or estimate of revenues
Demographics
- Go back to statistics and demographics;
- Assume a penetration percentage;
- Calculate volume in units;
- Apply price/cost per unit.
Similar market
- Select a similar market to yours (in size or in behavior);
- Extrapolate from a market you know well, or where more information is available;
- Adapt the number obtained for particularities of the market;
- Use as an estimate of market size, and not a precise number.
As a conclusion
It is now understandable how misleading a market share calculation can be and how companies can easily manipulate them. In order for you to use market shares effectively:
- Always write down your assumptions and make sure you compare "apples with apples."
- Always beware of market-research reports which often lack explanations of how the market calculation was done. In fact, you should almost
- Always pick up the phone and talk to the person who originated the calculation, to check his/her assumptions
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