Sales figures do not necessarily indicate how a firm is performing relative to its competitors. Rather, changes in sales simply may reflect changes in the market size or changes in economic conditions.
The firm's performance relative to competitors can be measured by the proportion of the market that the firm is able to capture. This proportion is referred to as the firm's market share and is calculated as follows:
Market Share = Firm's Sales / Total Market
Sales
Sales may be determined on a value basis (sales price multiplied by volume) or on a unit basis (number of units shipped or number of customers served).
While the firm's own sales figures are readily available, total market sales are more difficult to determine. Usually, this information is available from trade associations and market research firms.
Reasons Not to Increase Market Share
An increase in market share is not always desirable.
For example:
• If the firm is near its production capacity, an increase in market share might necessitate investment in additional capacity. If this capacity is under utilized, higher costs will result.
• Overall profits may decline if market share is gained by increasing promotional expenditures or by decreasing prices.
• A price war might be provoked if competitors attempt to regain their share by lowering prices.
• A small niche player may be tolerated if it captures only a small share of the market. If share increases, a larger, more capable competitor may decide to enter the niche.
• Antitrust issues may arise if a firm dominates its market.
• In some cases it may be advantageous to decrease market share.
For example, if a firm is able to identify certain customers that are unprofitable, it may drop those customers and lose market share while improving profitability.
Reasons to Increase Market Share
Market share often is associated with profitability and thus many firms seek to increase their sales relative to competitors.
Here are some specific reasons that a firm may seek to increase its market share:
1) Economies of scale - higher volume can be instrumental in developing a cost advantage.
2) Sales growth in a stagnant industry - when the industry is not growing, the firm still can grow its sales by increasing its market share.
3) Reputation - market leaders have clout that they can use to their advantage.
4) Increased bargaining power - a larger player has an advantage in negotiations with suppliers and channel members.
Questions : How do you thing about market share?
