Definition: 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.
An example of relative market share could be a company that is manufacturing cars. The company compares its market share of car sales against those of its competitors. If the company has 50% of the market share while its competitors have 30%, it has a higher relative market share.
The relative market share metric is an important tool that helps companies understand how their brand is performing in comparison to its competitors. It highlights the areas of improvement and gaps that need bridging, which can help them formulate better strategies for the future.
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What is Relative Market Share?
Relative market share indicates how a company stands in the market as compared to its primary competitor. It is different from market share as it shows a company’s revenue as a percentage in relation to the top earner in the same market. It can be calculated for overall revenue or specific products, brands, or categories.
It is an important metric because it helps you decide your marketing strategy. For example – If you hold the majority relative share as compared to competitors, then your strategies should focus more on customer retention so that you do not lose your market dominance.
On the other hand, if your relative share is lesser than the competitor, then you need to focus more on customer acquisition so that you can increase your market share. Thus, at all times, you have to keep one eye on the competitor and relative dominance 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)
Steps to Calculate Relative Market Share
For calculating relative market share, you need to follow these steps –
1. Decide what you want to measure
You can measure the entire market or you can simply measure one category, product, brand, etc. Measurements you should take depend on the size of your organization and your objectives. For instance, a large organization might want to measure the overall market, while a small company may choose to compare its product against its competitors.
2. Find out the company’s absolute market share
Calculate your market share by looking at your total revenue for the period you are measuring. Divide the total revenue by the market size and multiply it by 100. This will give you your company’s market share in percentages.
3. Calculate the competitor’s absolute market share
Do the same calculation that you did for your own company, but this time for the competitors. This will give you the competitor’s market share in percentages.
4. Compare both and find out the relative market dominance
Now divide your company’s market share by the competitor’s market share and multiply it by 100. This will give you the relative market dominance- the ratio of your market share to the competitor. A low percentage may indicate a substantial gap in market share between the company and the industry leader, while a high percentage commonly suggests that the company is among the top organizations in the field.
5. Keep on tracking the company’s relative market share calculation
In order to stay competitive, you need to track your relative share against the competition on a regular basis. It is important to note any changes in the market and make adjustments to maintain your position or gain a competitive advantage. This will help you understand the dynamics of the market and how they may affect your business. Knowing your relative market presence is an essential part of any successful marketing strategy.
By taking the time to measure and monitor your relative share, you can get a better understanding of how well your company is performing against its competitors. This knowledge will help you set more realistic targets and develop effective strategies to reach them.
Why use Relative Market Share?
1) To compare the two portfolios
The concept of Relative Market dominance is a highly useful yardstick and a mechanism for 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:
The firm has two brands with individual product offerings in two separate markets. And both brand enjoys a good market share of 25% as compared to the competition in the market.
In the first operational market, the firm is a market leader and the second player has a market share of 20%. Thus, the Relative 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 at number two and the brand that is leading the market enjoys a share of 50%. Thus, the Relative Market Share of the firm comes to 25%/50% which equates to 0.5.
With the aforementioned study, it is very clear that the market share in both 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 figure out their brand dominance and standing in the market against the competition.
In the first market, the brand is a leader with a high market share.
In the second market, the brand is quite a strong player and is giving tough competition to the dominant brand in the market.
2) Key measure against the main competitors
The concept of Relative Market Dominance works as an effective tool for 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.
3) To benchmark the market leader
The concept of Relative Market Dominance 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 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.
Absolute Market Share vs Relative Market Share
The concept and theory of Relative Market Share are quite different from the theory of Absolute Market Share as the latter 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
- Absolute 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 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 more comprehensive and exhaustive picture.
- The concept of Relative Share is quite a crucial calculation as it provides the company with an absolute market share additionally.
Market Share = (Company’s Sales / Total Market Sales) * 100
Relative Market Share = (Company’s Market Share / Largest Competitor’s Market Share)
Benefits of Tracking Relative Market Share
Some of the benefits of calculating relative market share are –
- Strategic decision-making: It helps the firm to strategically plan its moves and operations. It also paints a more accurate picture of where the firm stands among its competitors in terms of market standing.
- Finding out the main competitor: It helps the brand to identify who its main competitor is. This can help them devise better strategies to outcompete their rival in the market.
- Identifying opportunities and trends: It helps the firm understand possible revenue generation opportunities by pinpointing certain trends that exist in the industry. It also provides a thorough understanding of how their own products fare against the competition.
- Analyzing your product lines: It helps to analyze and break down the performance of individual product lines. This helps in understanding which products are performing well and which are not, thus giving them a clear indication of where they should be focusing their energy.
- Better industry understanding: It gives the firm a better understanding of the industry as a whole. It helps to identify key trends and movements in the market which helps them make informed decisions.
- Lets investors find their footing: It also provides investors with a better understanding of the market and helps them identify potential investment opportunities.
Example of Relative Market Share Calculation
ABC Electronics Company operates within a suburb in New York City. Its management team wants to identify the company’s top competitors in that suburb’s consumer electronics market. The total revenue for all consumer electronics stores in that suburb is $1 million in a calendar year, and ABC Electronics Company earned $50,000 within the same period.
Dividing its revenue by the total industry figures allows ABC Electronics Company to determine it holds 5% of the market share. Its main competitor, John’s Gadgets Store, earns $900,000 in a year, which is 90% of the market share. The agency’s management team can use these percentages to determine their company’s relative market share. Using this formula, the team determines ABC Electronics Company has a relative market share of 5.6%:
Relative market share = (0.05 / 0.9) x 100
Relative market share = 0.056 x 100
Relative market share = 5.6%
By calculating their relative market share, management teams can get an accurate assessment of their company’s performance and identify their top competitors in the industry.
To calculate relative market share, the total industry revenue should be taken into account. This is done by taking the total sales of the company and dividing it by the total sales of its competitors. A market share calculator can help you with this calculation easily and accurately.
Overall, Relative Market Share helps companies better understand their own brand’s performance as well as analyze the performance of the leading competitor in their market. This helps them to make better decisions and gain a competitive edge over other players in the market.
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