What is Market Share Variance?

Market share variance shows the impact of a change in market share on the profits of a business. This information can be critical when evaluating the marketing and other costs that will be incurred to create and maintain an increase in market share. If the marketing cost is not excessively high and the potential profit associated with an increase in market share is significant, then it can make sense to pursue an expansion of market share.

How to Calculate Market Share Variance

To calculate market share variance, subtract the budgeted market share percentage from the actual market share percentage, and then multiply by the total market (expressed in units) and multiply by the profit margin per unit. The profit margin per unit is usually considered the gross margin per unit, but it can also be expressed as the contribution margin per unit (which is higher). The formula for the market share variance is as follows:

(Actual market share % - Budgeted market share %) x Total market in units x Profit margin/unit = Market share variance

Problems with the Market Share Variance

There are some issues with making decisions based on the market share variance. First, competitors may react vigorously to an attempt to gain market share, resulting in higher costs or lower profit margins. And second, the amount of market share that will be gained with increased marketing expenditures can be difficult to estimate.