Relative Market Share can be defined as the methodology of comparing the brand’s market share against the market share of the competitor’s brand in the market. It gives the company an insight into the market share of the brand in the same operational market as its competitors.
Relative Market share is an important metric because it helps you decide your marketing strategy. For example – If you hold the majority market share as compared to competitors, then your strategies should focus more on customer retention so that you do not lose the market share.
On the other hand, if your relative market share is lesser then the competitor, then you need to focus more on customer acquisition so that you can increase your market share. Thus, at all time, you have to keep one eye on the competitor and relative market share gives you a good understanding of how you rank against a competitor.
Relative Market Share Formula
Relative Market Share (%) = 100 * Market Share of the Brand/ Market share of the Largest Competitor
The concept and theory of Relative Market Share are quite different from the theory of Absolute Market Share as the later is calculated by dividing the sales of the brand by the total sales of the product category in the market.
Relative Market Share helps the brand to compare its market standing with its competitors.
Whereas Absolute Market Share showcases the growth potential of the firm in the operational market
Top reasons to use Relative Market Share:
1) To compare the two portfolios:
The concept of Relative Market Share is highly useful yardstick and a mechanism for the large corporate firms that have multiple product portfolios and brands. Plus they are operating in a business environment that is highly competitive in nature.
Let us discuss the same with an example:
In the first operational market, the firm is a market leader and the second player has a market share of 20%. Thus, the Relative Market Share of the firm comes to 25%/20%that equates to 1.25.
In the second operational market, the scenario is different as the firm stands on number two and the brand that is leading the market enjoys the share of 50%. Thus, the Relative Market Share of the firm comes to 25%/50% that equates to 0.5.
With the aforementioned study, it is very clear that the market share in both the cases is 25% but there is a difference in the Relative Market Share in both the market.
It helps the research team and executives of the firm to figure out their brand dominance and standing in the market against the competition.
In the first market, the brand has is a leader with a high market share.
In the second market, the brand is quite a strong player and is giving a tough competition to the dominant brand in the market.
Role of Relative Market Share
1) Key measure against the main competitors
The concept of Relative Market Share works as an effective tool the smaller brands in the market. And the main reason behind the same is that they won’t be interested in the comparative study against the main player or a market leader in the industry. They would prefer to have a comparison with the direct competitors in the market that work on a similar scale and finances.
2) To benchmark the market leader
The concept of Relative Market Share is also known as the marketing metric or a mechanism that is used as a benchmark against the main player or a market leader. Actually, that is the main motive and modus operandi of the same.
Market shares are highly dynamic in nature as they keep on evolving and changing owing to the various factors. And the metric of Relative Market Share helps the brand to track its performance against the biggest player or a brand in the market.
The brands that are huge in nature and working have a set of bigger benefits such as loyal customers and followers, huge marketing and promotional budgets, strong relations with the vendors, good relations with the investors, huge working capital and financial investments, good relations with the retailers, high success ratio, and the ability to sell their products at a premium amongst others.
With the set of above-mentioned factors, the market leaders also have to compete with the other niche brands and are also frequently challenged on the front of innovation, novelty, and retaining the long list of their loyal followers and customers.
Even the market leader opts and applies the theory of Relative Market Share to track its success rate and ration against the number two and number three positioned brands in the market in order to stay astute on its place and standing.
Things to consider while measuring Relative Market Share
- As discussed above in the article, the concept of Relative Market Share works on the agenda of the brands comparing themselves against the market leader that is a huge player. And the main yardstick of the measurement is the market share. It is necessary for the brands to benchmark the main player. And for the main player to find out his Relative Market Share, it is vital for him to compete with the players at the second and third position.
- It is also quite imperative to consider that there should be only one strong market player that enjoys the biggest pie of the market share.
- All the other brands will have a Relative Market Share less than the main one. And the smaller or new players will have a very low Relative Market Share figure.
Difference between Absolute market share and Relative Market Share
- Absolute market share helps the company to figure out how it is faring in terms of the commercials and profits as compared to its competitors in the market. It also helps the financial institutions and investors to evaluate the firm’s performance on a broader spectrum. When the firm draws a comparative chart of its sales figure pitted against the competition, it paints a much comprehensive and exhaustive picture.
- The concept of Relative Market Share is quite a crucial calculation as it provides the company with an absolute market share additionally.
Significance of Relative Market Share
- It helps the firm to devise its next business strategies in terms of marketing, promotions, and manufacturing of the product offerings.
- The decisions arrived helps the firm to fuel its growth figuring out all the resources required to accomplish its aims and objectives.
- It helps the firm to know its standing in the market and in the eyes of the customers.
- It helps to find out the specific competitors that are posing as a threat to the firm and device a strategy on how to outdo them.