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. The calculation of market share variance is as follows:

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

There are some issues with making decisions based on the market share variance. For example:

  • Competitors may react vigorously to an attempt to gain market share, resulting in higher costs or lower profit margins
  • The amount of market share that will be gained with increased marketing can be difficult to estimate