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Let’s Break Down the Concepts of Market Share

I will cover the differences between unit market share, revenue market share and relative market share.

Market share is one of the original measurements utilized by marketing. It’s a way for marketers to dictate and track how their brand is doing compared to its competitors. Indicators like brand value proposition, sales, advertising and distribution come to influence this measurement. Market share reveals the size of a company in relation to the market it’s in. Let’s take a closer look at market share.

Market Penetration

The calculations for market share consists of real sales not potential consumer sales. That is where market penetration comes into the picture. It invites the total population of a market into the equation. Literally. To calculate market penetration, divide customers who purchase a product in a specific category by the total population. For example, if there are 300 million people in the United States and 83 million of them are active users of Spotify, that would mean the market penetration of Spotify users would be around 28%.

Relative Market Share

This calculates a business’ or brand’s market share in regards to its leading competitor. It gives managers the ability to measure the relative market positions of their brands across markets comparatively. It can provide insights and recommendations on pricing power and relative cost of your brand. A small relative share means pricing power will be lower and the cost will be higher. Imagine you are trying to find the relative market share of your local restaurant. Let’s say the most popular restaurant chain makes $10 million a year on services, which contributes to 10% of market share. Now to take things a step further, divide your number of shares by theirs (2 percent/10 percent) which will ultimately give you 20% relative market share.

Market Concentration

Put simply, it is how a small number of firms account for the total percentage of the market. High concentration ratios lead to less competition while low concentration ratios reveal the advantages of mergers, acquisitions and differentiation. Newer brands would be less likely to use this kind of strategic calculation because of oversaturated marketplaces dominated by a couple of businesses. So, if you are a company like Starbucks you would benefit from calculating your current market concentration because you are one of the top brands within that specific marketplace. But if you were a new locally run coffee shop I wouldn’t seek out your market concentration because there are minimal amounts of market opportunities.

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