Market share is the proportion of an entire market's sales that is taken by a specific organization. It is represented as a percentage of the market. To calculate market share, divide the firm's sales by the sales of the entire market for the indicated measurement period. The formula is:
Company sales ÷ Entire market sales = Market share
For example, a business has sales of $10 million and the entire market is $200 million. The business therefore has a 5% share of the entire market.
A variation on the concept is to calculate market share based on the number of units sold, rather than the share of sales within a market.
Owning a large percentage of market share is a strong indicator of the success of a business, especially if that share is increasing over time. The market share percentages of all major competitors in a market are commonly calculated and compared, to determine the relative success of each business.
A large market share can give a business price leadership in the market, where competitors are more likely to follow the price points established by the company. This situation most commonly arises when the business is the low-cost leader in the industry. However, a business that offers goods at a low price point may not be the most financially successful one in the industry. A smaller business might reap more profits by occupying a more profitable niche within the market.
If a business attains quite a large market share, it may be subject to anti-competition laws. Under these laws, the government may not allow it to complete proposed acquisitions on the grounds that they may result in an excessively high market share and therefore a decline in competition in the marketplace.