In this article we will discuss about the meaning and determination of market share of a company.
Meaning of Market Share:
Market share is the percentage of a business’s sales relative to the combined sales of all competitors in a given market. By achieving a large share of the market in which it competes, a business firm can gain important advantages over its smaller rivals.
Market share analysis refers to a technique by which the relative merits of a company’s product in comparison with the competitor’s products are determined. It assists in knowing the present and long-term demand for the particular product of a company in relation to the total demand for the same product in the market.
Such analysis requires an explicit evaluation of competition and of the company’s market plans in terms of their effect of a firm’s position in the industry. This analysis is a part of corporate planning vis-a-vis market planning exercise.
The market share analysis is effective when trends are reasonably predictable and competition is centred on market share. In industries like fashion garments or toys for children, market shares are very unstable.
Thus, any attempt to project market shares from historical data is likely to be misleading both in the short-run and in the long-run. It is only an approximate indicator of market position due to changing market conditions.
Determination of Market Share:
In order to determine the market share, the total demand forecast is subjected to competitive analysis and a sales forecast for the company is prepared. The measurement of market share becomes meaningful if the ‘industry’ can be precisely defined in terms of directly substitutable, non-differentiated products. In practice, market share measures can be only approximations of the market positions.
In other words, we find that there are three determinants to ascertain market share:
(i) Total demand forecast,
(ii) Competitive analysis, and
(iii) Sales forecast.
(i) Demand Forecast:
There are various methods and techniques of quantitative forecasting of demands such as extrapolation, regression analysis, input-output analysis, and econometric models.
Extrapolation implies projection of past trends. For example, a graph of past demand and sales for a product may be projected in the future and adjusted for any changes that are expected to occur. Time series analysis and exponential smoothing are used for the purpose of extrapolation.
Regression analysis is an independent forward projection technique that uses casual relationships between the elements of a situation. It predicts the dependent variable (say, demand in quantities of a product) on the basis of value of one or more independent variables (such as population changes, purchasing power, employment level, etc.).
Input-output analysis, which is appropriate for a short-term demand forecast, can be used to study a company and a market. It shows the inter-industry flow of products and services within the national economy on the assumption that output of one industry is the input of another industry and that there is no technology change over the forecasting horizon.
Econometric models, which are predictive and descriptive in nature, take the help of economics, mathematics, and statistics in order to express economic relationships. It is a system whereby hypotheses are developed concerning the relationships among a set of variables and a certain economic phenomenon.
For example, it might be hypothesised the demand (QM) for a commodity like ‘Maggi’ is a function of its price (P), the prices of other specialised food items like complain or Horlicks(PM) the price of egg (PE) which is used with it, the purchasing power of the buyer (B), the level of advertising (A), the tastes and preferences of buyers (T), and so on.
This may be expressed in the following functional relationship:
QM = f (PM , PC , PE, B, A, T, etc.)
The selection of statistical data is important in testing the validity of the model and then computing the parameters of the model.
(ii) Competitive Analysis:
It involves:
(a) Identification of competitors and their present market share;
(b) Comparison of the marketing strategies (product quality/pricing/discount/packaging/distribution/promotion, etc.) of different competitors; and
(c) Forecast of changes in marketing strategies and their impact on the market share of each competitor.
(iii) Sales Forecast:
There may be long-term and short-term sales forecasting. The function of long-term forecast necessitates information about market conditions for a good length of period (5 or 10 years) upon which a rational plan of expansion, modernisation, or diversification is based. In short-term forecasts, emphasis is on seasonal fluctuations in demand or on temporary changes in national income levels.