Guide: How To Calculate Relative Market Share (With Formula)
By Indeed Editorial Team
Published 27 September 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Relative or comparative market share is a metric that helps monitor the market position of a company as compared to its potential competitors. Investors typically use this method to measure a business's financial health and performance. Learning how to calculate this value can help you determine the market share of the company you work for and determine its performance compared to others within the industry. In this article, we discuss what relative market share (RMS) means, show you how to calculate it and also provide tips on increasing it for your reference.
What Is Relative Market Share?
Relative market share (RMS) is the percentage of a company's market share compared to its main competitors. Professionals can analyse the market share for particular products, services and overall sales of a company. Here, the market share is the amount of profit a company makes from selling its services and products. For instance, let's say Brand A has a 20% market share; brand B has a 60% market share and brands C and D have a 10% market share each in the food industry. In this scenario, Brand A's market share does not seem very attractive.
Alternatively, consider there are three companies in the tech industry. Brand A has a 40% market share, brand B has 35% and brand C has a 25% market share. Here, 40% of the market share may seem impressive to the other two competitors, making brand A the leading industry performer in the particular niche. Both examples show that in fields with lesser competition, brands may earn a higher market share. This is how the market share helps companies predict their financial performance and plan their promotion strategies accordingly.
How To Calculate Relative Market Share
There are standard formulas and metrics that can help you calculate and compare the market share with the significant contributors in the industry. With an exact idea of this parameter, you can have greater clarity about a company's market performance. Here are eight steps to calculate comparative market share:
1. Decide what you want to calculate
As business analysts can calculate the comparative market share in different industries, you can first decide on the business area that you want to explore. For example, while calculating comparative market share in a specific industry, you first can decide on a product category, like jewellery, electronics or clothing, and then decide on a particular product like a necklace, mobile or trousers. Many companies calculate comparative market share on all their product sales or for the entire company and compare it to the leading competitors within the industry.
2. Examine the sales at a specific time
To make sure you are making an accurate comparison, consider examining the sales within a specific period. You can study sales over the length of six months or one or more years. For example, you want to calculate the comparative market share of the company you work for compared to its competitor. You can study the financial statement of the competitor company from the last year to monitor the total sales and compare them with its sales made in the previous year.
3. Measure the market share
A company's market share indicates its financial health and success. You can calculate market share by dividing the company's total revenue by the industry's total revenue within a fiscal period. It is necessary to calculate the company's relative share to understand its market position. You can calculate a company's sales to get revenue figures and conduct comprehensive market research to find the industry's total revenue. After collecting both numbers, you can calculate the percentage of the market share by dividing the revenue by the entire industry revenue.
4. Calculate the competitor's market share
Once you calculate the market share, start determining the market share of the competitive companies. It can help you assess the performance of different peer companies within your industry and identify the biggest competitor. It can also allow you to understand most brands' average market share and provide a benchmark for how you can change your promotion strategies to increase profits.
5. Decide the relative share
To determine the relative share, consider dividing the company's market share by that of its highest competitor and multiplying that number by 100 to get the relative share percentage. If the percentage is low, the difference between you and your competitor is higher, which indicates you might work on your marketing strategies to increase the revenue.
6. Use the formula
There are two principal formulae to calculate the company's relative share. They are:
RMS = Company's sales / Biggest competitor's sales
RMS = (Company market share / Biggest competitor's market share) x 100
If your relative share percentage is greater, it ensures a chance of becoming the most competitive business in the industry.
7. Use the growth-share matrix
The growth-share matrix offers a map of the company's service strengths and weaknesses regarding current profitability and potential cash flows. The matrix is a table split into four quadrants, each with a distinct symbol representing a certain degree of profitability. Here are the four signs and their significance:
The question mark category is at the top right quadrant and refers to product sales that offer high growth but low share. These may include recently introduced products with stable commercial prospects and the potential to become stars.
The stars category is at the top left quadrant and signifies products that can ensure high growth and high share. Companies can invest in these products as they have high future potential, and so stars may generate higher returns on investment than the other three quadrants.
The cash cows category is at the bottom left quadrant and exhibits low growth and high share. Companies can reinvest in these products as they typically command a significant market share in a slow-growth industry.
The last category, dogs, is at the bottom right quadrant and refers to low share and low growth. The low performance can be because of inferior quality, high performance and lack of effective marketing and implies that companies may want to liquidate the products or reposition them to ensure minimising losses.
8. Monitor the relative share
You can monitor the relative share on a monthly, quarterly or yearly basis to analyse how the business is performing in the market. It can help you understand whether it is growing the market share or if it is necessary to increase your marketing and sales efforts to improve your market position. While calculating the relative share, the market leader's market share is the reference point to assess the company's performance and position in the market.
Tips To Increase Relative Share
It is important to use effective business strategies and tools to maintain competitiveness in the market and ensure long-term profitability. Here are a few tips you can consider for increasing market share:
Improve the quality of the product
It is crucial to find the weakness of your competitor's products to thrive in the competition, such as poor customer support, no warranty, exchange issues or other problems that may affect user experience. Once you identify this information, you can understand your customers' requirements and accordingly decide the required improvements in the product or service you offer.
Change the marketing strategy
A well-thought marketing campaign improves brand awareness, acquires new customers and enhances the company's sales. If the company you work for is relatively new in the industry, consider leveraging free marketing tools, such as social media and email marketing. You can choose the channels where your potential customers are more active. Social media campaigns, retargeting ads and web push notifications are effective and cost-friendly tools to promote your products.
Nurture your customers' interest
It is important to ensure your potential leads convert to long-term clients or customers. You can achieve this by providing valuable content and prompt customer support whenever required to deliver a satisfactory end-user experience. Consider offering short checklists, case studies, reviews and step-by-step guides to retain your valuable leads.
Conduct a referral program
Loyal customers are often an important asset. They can help keep the revenue consistent and introduce new customers to the product or service. Consider rewarding referring customers with discounts, coupons, personalised offers and trial points. This can also help you retain your clients for a longer period, besides encouraging them to refer the product to their acquaintances.
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