Determining Market Share

by smartamarketing

The Role of Market Share

Conventional marketing wisdom holds that the best strategy is the one that results in the highest market share, and that managers should therefore strive to maximise the market shares of their brands. Implicit in this “wisdom” is the assumption that higher market share leads to higher profits and return on investment (ROI). If this assumption is true, the process of strategy formation is relatively straightforward. If it is not true, however, or if it is true only under certain conditions, it becomes necessary to test alternative strategies against both market share and profitability criteria. What, then, is the effect of market share on short- and long-term profitability?

Share of What?

The first question is, how do you determine the size of the market?  Is it by current sales or do you have some concept of the market potential?

One of the most difficult challenges in implementing a strategy of increasing market share is to answer the question: Share of what? If we define the market widely, we will have a low share; if we define it narrowly (as a market segment), we will have a high share.

It is therefore critical to define the relevant market correctly when assessing a firm’s market share. The product-segmentation methodologies are useful in this process inasmuch as they group products that compete for consumer choices, and thus provide the manager with a hierarchical description of the competitive structure in which he or she is operating. Nevertheless, the manager must determine what level of the hierarchy represents the relevant market.

It is usually best to focus on a managerially relevant segment that is consistent with consumer definitions of alternative choices. What-ever the market definition, consistency in planning and implementation is critical. It is unsound, for example, to claim that one has a high share (of a small segment) when competing for corporate resources, and a small share (of the total market) when trying to motivate a sales force or distribution network.