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What Is the Difference Between Relative Market Share and Absolute Market Share?

By Motley Fool Staff – Updated Dec 23, 2016 at 4:35PM

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And why both calculations are good to know.

Market share is the amount of the market that is controlled by a single company. It is a strong indication of how a company is doing within a given market or industry. For many companies, increasing market share is a key objective. Not only does a higher market share mean that a company is doing more business, but it also influences the way investors perceive that company. A company with a declining market share might be viewed as undesirable from an investment standpoint, whereas a growing market share is indicative of a company's overall strength.

Absolute market share
Absolute market share shows how a company is faring in terms of its competitors. It also enables outside investors to evaluate a company's performance in the context of a larger market. It's one thing for a company to report sales figures on their own, but presenting those figures in comparison to other companies in the same industry paints a much broader picture.

Market share is calculated by taking a company's sales over a specified period of time (such a year or quarter) and dividing it by the total sales of that company's industry over the same period. Let's say you want to calculate the market share for Company X, a producer of coffee makers, over the course of one year. If the company had total revenues of $10 million during that period, and the coffee maker industry had total revenues of $100 million during that period, you'd divide $10 million by $100 million to arrive at a 10% market share for Company X.

Relative market share
Relative market share shows how a company is faring in terms of its leading competitor. Relative market share is an important calculation because it gives a company's absolute market share additional context. Let's say Company Z has a 30% market share in the mattress industry. What that tells us is that 70% of the mattress industry is controlled by other companies. Now in some industries, a 30% market share might mean a company is a leader in its field, but in others, 30% might represent second or third place among the major players. Relative market share allows companies (and their investors) to see how they're faring in terms of their largest competitors so that they can make strategic decisions to increase sales.

Relative market share is calculated by subtracting a company's market share from 100 to find the percentage it does not control. If Company Z controls 30% of its market, this means it does not control 70%. From there, the company's market share is divided by the percentage of the market it does not control. Using our example, we'd divide 30% by 70% to arrive at a 42.8% relative market share for Company Z.

Significance
Both absolute market share and relative market share can help businesses make strategic decisions to fuel their growth. While absolute market share shows how much growth potential a company has within its industry, relative market share offers insight on how to identify and outperform specific competitors. Additionally, it's helpful to calculate absolute and relative market share on an ongoing basis to see whether a company is enhancing its position within its industry or increasingly falling behind the competition. 

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