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The Street
The Street
TheStreet Staff

What Is Market Share? Definition, Explanation & Examples

A company's market share can be thought of as its slice of the industry pie.

Gaelle Marcel via Unsplash; Canva

What Does Market Share Mean?

Market share refers to the percentage of an industry’s sales that belong to a particular company. In other words, market share is a single company’s “share” of an entire industry’s revenue—its slice of the pie, so to speak. The company with the largest market share in a particular industry or product category is known as the market leader.

Companies gain and lose market share all the time, and some invest considerable marketing resources in attempts to siphon market share away from competitors. Think about internet or cell phone service, for instance. How often do you hear or see an ad from one service provider attempting to entice customers of other service providers to “switch and save?” Any ad like this is an attempt by a company to grow its market share by converting its competitors’ customers using some sort of incentive.

How Is Market Share Calculated?

Market share is calculated by dividing a single company’s sales for a particular period by the total sales of its industry during the same period. The result can be expressed as a percentage.

For instance, if Peter Peanut sold $400 worth of peanuts over the course of a year, and the peanut industry’s sales totaled $3,000 for the same year, Peter Peanut’s market share would be . . .

$400 / $3,000 = 0.133 = 13.3%

Of course, some companies offer multiple products that fall into multiple product categories. For instance, Apple offers smartphones, computers, and digital storage. If you wanted to figure out what Apple’s share of the smartphone industry is, you wouldn’t use apple’s total sales. Instead, you’d divide only their smartphone sales by total (industry-wide) smartphone sales.

Market Share Formula

MS = Company Sales / Total Industry Sales

Or

MS = Company Sales of One Product Type / Industry-Wide Sales of Same Product Type

This pie chart shows what proportion of  2021's electric vehicle market belonged to each electric vehicle manufacturer. 

Blomst via Pixabay, Canva

Market Share Example: Tesla (NASDAQ: TSLA)

In 2021, 14% of all electric vehicles sold worldwide were Teslas. This means that Tesla had the largest market share of any electric vehicle manufacturer in the world. Volkswagen and SAIC took second and third place, with 12% and 11% shares respectively. In growing industries like electric vehicles, competition for market share can be fierce, but it can also drive innovation and fairer pricing models.

How Do Companies Gain and Lose Market Share?

There are many ways that companies can gain market share. Below are just a few examples.

  • Low Prices: A company may set its prices low and accept slimmer margins in an attempt to offer the lowest prices in a particular industry with the hopes of growing its market share. If its competitors fold, a company may increase its prices later on once more market share is secured.
  • New Offerings and Innovations: Within any given product category, one company might come out with a new feature or a new version of a product (for instance, a camera company could make all of its products waterproof). When this occurs, customers of competing companies may flock to the company offering the new feature since—at least for a time—it is the only one in the industry to do so.
  • Customer Loyalty Incentives: A company may offer its customers incentives in return for their loyalty. Starbucks, for instance, has a smartphone app with an integrated rewards system that allows customers to earn points with each visit. These points can then be redeemed for free products. Many airlines offer similar programs wherein customers can earn miles or points toward future flights every time they purchase a ticket.
  • Mergers and Acquisitions: Sometimes, a company may purchase (or merge with) its competitor. In doing so, it gains that company’s market share, and by integrating the acquired company’s strengths and assets with its own, it can often attract additional customers from remaining competitors in the industry.

So, then, how do companies lose market share? Usually, they do so by failing to keep up with the competition in the ways mentioned above. If a company stops innovating or fails to use marketing tools to attract and retain customers, it may slowly lose its customer base to competitors that are doing a better job keeping up with the industry and customer needs.

How Should Investors Interpret Market Share?

How does market share affect stock price? Should investors make buy and sell decisions based on changes in a company’s market share? These are complicated questions, and the answer varies with each individual situation. It is important to remember, however, that changes in market share affect different industries differently.

In newer, growing industries that are still attracting new consumers and breeding new innovations, market share can change often and quickly, but this is not necessarily cause for alarm. Because the industry itself is still growing, there is more total market share to go around with each passing day. A small slice of a growing pie can grow with the pie, so to speak.

In mature industries, on the other hand, changes in market share can have more severe consequences. When an industry or product category is mature and well established, its customer base does not grow particularly quickly. This means that a loss in market share could have a severe impact on a company’s bottom line, which could, in turn, affect the value of its stock.

 As a general rule of thumb, when investing in mature industries, well-established companies with good market share and histories of customer retention can be the safest picks. When it comes to growing markets, industry-specific ETFs offer an easy way to diversify and spread risk across a variety of companies.

What Market Share Constitutes a Monopoly?

When we think of a monopoly, we usually picture one all-powerful company that is the only option for consumers when it comes to a particular product or service. According to Justice.gov, however, “a market share of greater than fifty percent has been necessary for courts to find the existence of monopoly power.” So, in a legal sense, any market share over 50% could potentially constitute a monopoly. 

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