Definition: Market share is a firm’s percentage of an industry’s total sales. It is calculated as the product of the firm’s sales over the industry’s sales during a specified period. In other words, it’s the amount of sales a company gets compared with its industry as a whole. MS can be divided by industry, product category, or even specific product. For example, Apple has a huge MS is smartphone industry, but it has a small MS in the personal computing industry.
What is the definition of market share? The market share indicates how a firm performs relative to its competitors. Usually, a higher market share implies that a firm realizes higher sales than its competitors because it successfully expands its customer base. This isn’t always the case though. Sometimes there are simply barriers to entry in the industry that allows a firm to control a high percentage of the industry. This often leads to a monopolistic structure.
Companies try to gain sales and beat their competition in many different ways. Some try to increase their economies of scale (a greater output at a lower average cost) in an effort to provide lower cost products to consumers while others try to increase brand recognition and consumer loyalty.
Let’s look at an example.
Example
In the fiscal year 2015, the total sales for the pharmaceutical industry reached $1.3 trillion. During the same period, the revenues of pharmaceutical company X were $47.4 billion.
The market share of pharmaceutical company X is calculated as follows:
Market share = $47.4 billion / $1.3 trillion = 3.6%
Given that pharmaceutical companies face huge research & development (R&D) costs, and it takes a long time until a drug is approved by the FDA, generating almost $50 billion in sales is a great achievement.
In order to capture more MS, the pharmaceutical company X decides to market unique products, which can be offered at different price levels to meet consumer needs. The company also decides to specialize in the treatment of cardiovascular diseases and will target customers that belong to test groups. By coming out with more products and appealing to new customers, this strategy will help the firm expand its customer base and increase its total sales and MS.
Keep in mind that a profitable company does not necessarily have a large market share in the industry. Profits and MS are not always directly related.
Summary Definition
Define Market Share: Market share is the proportion of total sales for an industry, product category, or individual product that a single company has.
