What is relative market share?
Relative market share is a marketing metric used to compare the firm’s market share to the largest competitor in the market. When calculating relative market share, the market leader’s market share is used as the benchmark.
This metric is particularly useful in the context of the Boston Consulting Group (BCG) Matrix, a tool used for portfolio analysis in strategic management and marketing.
The formula for relative market share is:
% Market share of the firm’s brand/% market share of their largest competitive brand in the market
Example for calculating relative market share
Let’s assume that there are just five brands in the marketplace and their unit market shares are shown here.
As Brand A is the market leader, it is used as the benchmark to calculate the relative market share metric for ALL other brands – in other words it sits at the bottom (denominator) of the formula calculation.
The exception is when calculating relative market share for the market leader itself (Brand A in our example), which is compared to their largest competitor. This is demonstrated in the following table:
Relative market shares
The calculation of relative market shares for each of the brands is as follows:
- Brand A = 40%/30% = 1.33
- Brand B = 30%/40% = 0.75
- Brand C = 20%/40% = 0.50
- Brand D = 6%/40% = 0.15
- Brand E = 4%/40% = 0.10
Important Notes on the Relative Market Share Calculation
- As you can see, all brands are compared against the market share of the market leader – except for the market leader itself, which is compared against their largest competitor (the 2nd ranked brand in the market = Brand B in this example).
- And there can only ever be one brand/firm that has a relative market share greater than one. This will be the market leader only. All other brands (or firms) will have a relative market share of less than one. And many small brands will have a very low relative market share figure.
Why is relative market share is an important marketing metric that helps businesses understand their position in the market relative to their largest competitor, often considered the market leader.
A more detailed explanation of relative market share
Definition and Calculation
- Relative market share is calculated by dividing a company’s market share by the market share of its largest competitor.
- For example, if Company A has a market share of 20% and the market leader has a market share of 40%, Company A’s relative market share would be 0.5 (20% / 40%).
Purpose and Importance
- This metric offers a more nuanced view than simply considering absolute market share. It provides a comparative perspective that can be more insightful for strategic decision-making.
- It helps in assessing a company’s competitive strength within the market. A higher relative market share might indicate a strong competitive position.
Use in BCG Matrix
- In the BCG Matrix, relative market share is one of the two dimensions used to evaluate the strategic position of business units.
Business units with high relative market share are typically classified as ‘Stars’ or ‘Cash Cows,’ suggesting they are in a strong competitive position.
Limitations
- One limitation of using relative market share as a metric is that it focuses only on the largest competitor and may ignore other significant players in the market.
- It may not always reflect a company’s actual competitive position if the market is fragmented or if there are several close competitors.
Strategic Implications
- Companies use this metric to tailor their strategic approaches, such as focusing on growth strategies in areas where they have lower relative market share.
- It can guide investment decisions, marketing strategies, and resource allocation.
Dynamic Nature
- Relative market share is a dynamic measure that can change over time as the company’s or competitors’ market shares change.
- Continuous monitoring is essential to understand market trends and the company’s relative position.
Broader Market Understanding
- While relative market share offers valuable insights, it is most effective when used in conjunction with other metrics, such as market growth rate, customer loyalty, and brand strength.
Related Articles and Tools
Sources and External Reading
- Relative market shares – Marketing Study Guide – This article provides an overview of what relative market share is and how it’s calculated, using the market leader’s market share as a benchmark.
- Relative Market Share – Measuring Marketing – Wiley Online Library – Wiley Online Library offers insights on analyzing a brand’s market share against its closest competitor through relative market share, showing how it performs versus key competitors in a specific category.
- Why Use Relative Market Share? – Marketing Study Guide – This resource explains the reasons for using relative market share as a benchmark against the market leader, allowing brands to track their performance in the marketplace.
- Relative Market Share: Benefits and How To Calculate It – Indeed – Indeed discusses the benefits of calculating relative market share for a company’s leadership team in understanding their control over a market or industry.
- Examining Why and When Market Share Drives Firm Profit – SAGE Journals – SAGE Journals explores how market share is used by firms to set marketing goals and monitor performance, including the relationship between market share and firm profit.
