What Is Market Share?

What does market share mean?

Market share is the percentage of total revenue that a product, service, or company accounts for in a category. While a company may not need a high market share to succeed, it's almost always beneficial and shows that products and services resonate with the target customer base.

How is market share used?

Market share can be interpreted along a variety of category distinctions and lines, including product pricing, geographic area, and release timing. For example, a relatively expensive, high-end car might have a large market share in the luxury auto market but still have a small sales share in the overall auto market. As another example, a carmaker could have a high market share in the U.S. but a much lower market share in other parts of the world.

Depending on how categories are broken down, a company may have more than one product or service competing for a share in the same market. For example, a beverage maker could produce multiple flavors of soda, with some offerings having a greater market share than others. On the other hand, combining sales numbers from all of the company's sodas and comparing that figure against total revenue from all players in the category may provide a better indication of how the business is performing in the space overall.

What is the relationship between market share and profit?

Market share is, first and foremost, a representation of relative sales strength, but it can also play an important role in shaping margins and overall profitability. In some cases, companies may be willing to lower prices or take on losses to improve their market share. Alternatively, businesses may opt to raise prices once they've reached a certain share because market strength and economic moats make it more difficult for competitors to enter and thrive.

As businesses increase in size, they often benefit from economies of scale. As the marginal cost to produce each additional product unit decreases, this creates a beneficial catalyst for profit margins. Sales and marketing budgets as a percentage of revenue also tend to decrease once a product or service is well known, adding another positive profitability catalyst.

Having a strong market share can also confer less immediately tangible benefits, such as improved brand strength. For instance, shoppers may be more likely to purchase a product or be willing to pay more for it if they know that it is a market leader.

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