Formula for Market Share
The market share is calculated as follows:
Impact of Market Share
1. Economies of scale
An increase in a company’s market share can allow the company to operate on a greater scale and increase profitability. It also helps the company develop a cost advantage compared to its competitors.
2. Increased sales
An increase in market share also helps boost a company’s total sales. When consumers notice the brand loyalty of a majority of their peers, the remaining consumers are also driven to purchase that product.
3. Increased customer base
An increase in market share also helps a company widen its customer base. When a majority of the consumer base is loyal towards one brand or product, the rest may also follow.
4. Reputation
An increase in market share helps enhance the reputation of a company. A good reputation, in turn, helps boost sales and broaden the customer base.
5. Dominating the industry
With an increase in market share, a company increases its dominance over the industry it operates in.
6. Increased bargaining power
With an increase in market share, a company starts to dominate an industry. With increased dominance over the industry, a company can exercise certain powers such as greater bargaining power. The company starts to enjoy an upper hand and can negotiate to its advantage with suppliers and distribution channel members.
How to Increase Market Share?
1. Innovation
Innovation is an excellent method of increasing market share. Innovation can be in the form of product innovation, production method innovation, or simply introducing new technology to the market that competitors are yet to offer. With innovation, a company can gain an edge over its competitors and dominate the industry.
2. Lowering prices
A company can also expand its market share by lowering its prices. Lowering prices will attract more customers and help widen the customer base and increase sales, hence increasing the market share of the company.
3. Strengthening customer relationships
By strengthening their existing customer relationships, companies protect their existing market and ensure no loss of the existing customer base owing to high competition. This also increases customer satisfaction, which in turn helps increase customer base through word-of-mouth.
4. Advertising
Advertising is an expensive yet effective way to increase market share. With heavy, cutthroat competition in the market, advertising is an excellent way of gaining an upper hand over competitors.
5. Increased quality
Customers are getting increasingly conscious about the quality of a product in addition to its price. By ensuring higher quality standards, a company can increase its market share.
6. Acquisition
Acquiring a competitor is a sure method of establishing dominance over an industry. By acquiring a competitor, a company not only gains access to a new customer base, but it also reduces competition and helps establish dominance over an industry and increase market share.
Illustrative Examples
- Apple Inc.: Apple is an excellent real-life example of a business that commands a large absolute market share and dominates the industry within which it operates. In the smartphone industry, it is one of the market leaders, fighting very strong competitors such as Samsung and Huawei. In the majority of the markets in which Apple operates, the US-based company enjoys, on average, a market share of 70%.
- Colgate: Colgate is another excellent example of a company that commands a large absolute market share. In the toothpaste industry, Colgate accounts for over 80% of all toothpaste sales.
Related Readings
Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To keep advancing your career, the additional CFI resources below will be useful:
Customer share refers to the percentage of a customer’s purchase that a firm receives in exchange for its goods.
The goal of a customer share strategy is to collect customers as much as possible. Retaining existing consumers is less expensive than acquiring new ones. Customer retention leads to improved gross margins, more profit, and increased revenue.
However, customer share is not just about customer retention; it also establishes trust with each customer.
The benefit of developing customer share
Customer share marketing is creating a well-organized, outward, proactive marketing strategy that aims to increase customer share by increasing the amount of business each customer performs with your firm.
Some of the best advantages of implementing customer share are:
- Using all applicable online and offline marketing tactics, drive your best prospects and consumers to your website.
- You obtain authorization from prospects and consumers who have expressed an interest in knowing more about your product or service.
- Having a customer share allows you to compete with and outperform the vast market leaders. Good service is in high demand among today’s consumers. If you treat a consumer well enough, they will reward you with their loyalty.
- Using that authority to conduct intelligent email discussions with prospects and customers improves customer connections and develops buyer-seller trust.
- Increasing the quantity of business with each customer by creating relevant commercial possibilities through permission-granted email activities
Customer share best practice
Customer share plays a significant role in a competitive market. This means that unless you focus on your consumers’ experiences, you risk slipping behind your competitors.
Here are some of the factors you have to consider to implement customer share in your business successfully.
Customer-centric approach
Customer-centricity is a corporate strategy and culture that focuses on providing the most outstanding possible customer experience while increasing brand loyalty.
Ensuring that your organization promotes a customer-first attitude and culture is the first step toward improving the customer experience.
Advertising
Advertising is a costly but successful method of increasing awareness. Customers are greatly influenced by almost any kind of advertisement.
Although advertisements have a favorable impact on consumer behavior, most consumers consider their needs before purchasing any goods or services.
Proactive approach
Main points that lead to customer turnover and user discontent may be discovered quickly after evaluating customer feedback data. Use this as a chance to improve your customer journey and take a proactive rather than reactive approach to customer experience.
Manage customer expectations
Surpassing your customer expectations is the best way to provide an exceptional customer experience. Always set fair expectations for your customers and then strive to exceed them. Customers will be pleased if you fulfill their expectations but will be blown away if you go beyond.
Leer en español
Ler em português
Companies spend a great deal of time and money trying to improve customer loyalty by measuring and managing metrics like satisfaction and Net Promoter Scores. But traditional gauges of loyalty correlate poorly with what matters most: share of wallet. This is the percentage of a customer’s spending within a category that’s captured by a given brand, or store or firm. Customers may be very satisfied with your brand and happily recommend it to others—but if they like your competitors just as much (or more), you’re losing sales. Making changes to increase satisfaction won’t necessarily help. This doesn’t mean traditional metrics aren’t valuable; it can be very useful to know whether your customers are satisfied and would recommend you to their friends and colleagues. But these measures in themselves can’t tell you how your customers will divide their spending among you and your competitors.
Walmart had a rude awakening in this regard. In 2008, guided by extensive customer feedback, it launched Project Impact, a remodeling initiative designed to improve customers’ experiences. It removed unsightly stacks of pallets from the aisles, trimmed distracting endcap displays, and thinned out overstuffed shelves. As expected, satisfaction scores rose. But same-store sales entered their longest decline in the company’s history. “The customers, for the most part, are still in the store shopping,” Charles Holley, Walmart’s chief financial officer, recently observed, “but they’ve started doing some more shopping elsewhere.” Even as satisfaction increased, share of wallet fell.
If traditional loyalty metrics don’t link to share of wallet, what does? To find out, we undertook a two-year longitudinal study of more than 17,000 consumers, looking at purchasing in more than a dozen industries and in nine countries. We asked a broad array of questions and collected ongoing purchase histories and satisfaction and loyalty ratings. Our analysis—to our knowledge the largest and most rigorous of its kind—revealed an elegant correlation: The rank that consumers assign to a brand relative to the other brands they use predicts share of wallet according to a simple, previously unknown formula, which we’ve named the Wallet Allocation Rule. From company to company and industry to industry, the correlation between a brand’s Wallet Allocation Rule score and its share of wallet was remarkably consistent—the average was greater than 0.9 (a perfect correlation is 1.0). Even more important, the correlation between changes in the Wallet Allocation Rule score and in a customer’s share of wallet was a robust 0.8. The correlation between changes in satisfaction or intention to recommend and in share of wallet was very weak—only 0.1.
The essential distinction of the Wallet Allocation Rule is that it takes into account both rank—Is your brand a customer’s first choice? Second?—and the number of brands in the set the consumer uses. Knowing these two values allows you to confidently predict share of wallet. (For a step-by-step demonstration of the calculation, see the exhibit “Using the Wallet Allocation Rule.”) For example, if your brand is one of only two a customer uses for a given purpose, the rule shows that the difference between being her first choice and being her second can have a major financial impact. In such a situation, even being tied has grave consequences: Half of each dollar you could be collecting from the customer is going to your competitor instead. The flip side is that the negative impact of being second diminishes as the consumer’s choice set increases.
Don’t let the math scare you. Calculating a company’s share of wallet requires just three steps and the application of a straightforward formula.
1. Establish the number of brands (or stores or firms) customers use in the product category you want to analyze. Let’s say that Stuart, Mary, and Joe all buy Acme, Mega, and Brand X detergent.
2. Survey customers and obtain satisfaction or other loyalty scores for each brand; convert the scores into ranks. In the case of a tie, take the average—for instance, if two teams tie for first place, assign each a rank of 1.5.
The chart below shows the ranks of the three detergents according to the satisfaction scores provided by Stuart, Mary, and Joe.
3. To arrive at a brand’s share of wallet for a given customer, plug the brand’s rank and the number of brands into the Wallet Allocation Rule formula:
Stuart’s share of wallet for Acme detergent:
Repeat the calculation for each customer and brand. To obtain a brand’s overall share of wallet, take the average of all customers’ share-of-wallet scores.
The Rule in Practice
The new rule has important implications for strategy. To understand what drives changes in share of wallet, managers need to shift their focus from drivers of satisfaction to drivers of rank.
First, you can’t assess brand performance as if it existed in a vacuum. That sounds obvious, but in reality it’s exactly what most managers do, measuring customer satisfaction or using other metrics that are based on customers’ perceptions of their brand alone. As a result, the loyalty objectives used to evaluate and compensate managers usually have to do with achieving a certain satisfaction rating (which rarely boosts share of wallet), not with improving a brand’s rank (which actually does).
Second, the rule makes it possible to craft strategies that directly affect brand performance and then measure the impact on share of wallet. Think about how a company typically tries to improve share of wallet. The effort often boils down to launching initiatives intended to make customers happier and then measuring satisfaction. As Walmart discovered, even initiatives that result in happier customers may have little or no positive impact on the top line. Instead, companies should understand exactly why their customers use each of the brands they do. If you’re not number one, you should ask your customers why they prefer your competitor and use the insights you gain to move up the ranking ladder. The Wallet Allocation Rule is clear on this point: If you can’t improve your rank, you can’t improve your share of wallet. (See the sidebar “How to Improve Your Rank.”)
Boosting your brand’s rank means minimizing the reasons your customers turn to your competitors. Below is a simple process you can implement right away.
Follow the Wallet Allocation Rule to establish the share of wallet of each competitor your customers use.
Determine how many of your customers use each competitor.
Calculate the revenue that goes from your customers to each competitor.
Identify the primary reasons your customers use your competitors.
Prioritize your opportunities to improve your share of wallet: Estimate the costs of addressing each reason your customers choose a competitor and weigh those costs against your potential financial return in each case. Remember to take into account the cumulative impact of addressing issues that apply to multiple competitors.
Let’s look at a composite case, drawn from our research, that illustrates how a full-service grocery retailer might put the rule to use. The grocer surveys its customers and finds that they are generally very happy with their experience—53% give the store a nine or 10 on a 0-to-10-point “would recommend” scale. However, despite these good scores, only 43% of customers rank the grocer as their first choice. The unpleasant implication is that 57% either prefer one or more of its competitors or consider the grocer to be tied with one of them. Using the Wallet Allocation Rule, the grocer calculates its average share of wallet and that of its three main competitors. Multiplying these estimates by its customers’ average monthly grocery spend and the number of its customers who also patronize the competing stores, the grocer determines that its top three competitors are extracting a total of $425 million from its customers’ wallets—some of which it could capture by moving up in the ranks.
Returning to the store’s customer surveys, managers learn that the top two reasons its satisfied customers recommend the grocer are the superior quality of its produce and the ambience. This is not surprising; management has worked hard to differentiate the grocer on these parameters. What attracts the store’s customers to the competition? The survey indicates that for Competitor One, the primary attraction is everyday low prices. Competitor Two also competes on price, but largely through rotating deep discounts. Competitor Three’s main appeal is the convenience of its locations.
The managers immediately realize that if the grocer is to move up to first place in more of its customers’ minds, it can’t simply enhance what it already does well; stocking even better produce or improving the aesthetics might further delight customers who already rank it first but would be unlikely to change the minds of the rest, who are mainly interested in low prices and convenience.
The grocer can’t compete on price in every category, so its managers decide to drop prices on its most commonly purchased staples, reasoning that customers who are already attracted to the store for its produce and ambience will then have less reason to shop at its strongest competitor, the everyday-low-price store. Surveys after the price change find that 49% of customers now peg the grocer as their first choice (a gain of 6%) and that the number of stores customers regularly shop in has dropped from 2.5 to 2, on average. These changes, when plugged into the Wallet Allocation Rule, translate to a seven-point increase in share of wallet. It’s the equivalent of shifting $62 million from competitors’ registers into the grocer’s own.
Many companies could see this kind of revenue jump if they decided not to pursue customer satisfaction for its own sake and focused instead on how satisfaction and other loyalty boosters could help them pull ahead of the competition. If growth is what you’re after, stop watching your scores and start paying attention to your rank. The path to winning has always been the same. It’s not just how many points you score that matters—you need to score more than your competitors do.
If growth is what you’re after, stop watching your scores and start paying attention to your rank.
You can’t assess brand performance as if it existed in a vacuum—but that’s exactly what most managers do.
A version of this article appeared in the October 2011 issue of Harvard Business Review.