Why use relative market share?

 

As a benchmark against the market leader

Relative market share is a marketing metric that is essentially used as a benchmark against the market leader. Market shares will move around for many reasons and underlying factors, but this metric allows the brand to track their performance against the biggest brand in the marketplace.

It allows firms to answer the question: While we are gaining/holding/losing market share; how do we compare to the market leader?

Large brands have many substantial advantages – such as, a greater customer following, stronger retailer relationships, the ability to charge a price premium, greater success rates with product line extensions, greater opportunities for social media and publicity, larger promotional budgets, and so on.

Given this set of competitive advantages, these firms/brands should be able to slowly increase their market dominance over time – but market leaders also have to compete on more competitive fronts and are frequently challenged, particularly in niche markets.

tracking relative market shareTherefore this metric allows an individual brand to track its performance against the market leader.

The market leader itself uses relative market share to track itself against the number two brand in the marketplace. Obviously their goal is to increase their level of market dominance.

This can be seen in this table – where both the market leader and the smaller brand are both gaining market share (presumably against the smaller brands in the market) – but the relative market share metric highlights that the market leader’s relative competitive advantage has slightly decreased – from 2.50 to 2.42.

unit versus relative market share

Compare these two graphs – the first shows the change in unit market share and the second shows the change in relative market share – they are both based on the same underlying market share figures.

As you can see the market leader looks like it’s improving its market share position in the first graph, but on a relative basis (relative to the second brand in the marketplace), it is slowly losing its relative competitive advantage.

As a comparison between portfolios

Relative market share is also a very effective metric for large firms when they have multiple portfolios and lots of brands operating in the marketplace.

Take the following scenario as an example:

A firm has two brands in two different markets – both with a 25% market share.

  1. In the first market they are the market leader, and the second player has a market share of 20%. This would mean that the relative market share would be 25%/20% = 1.25.
  2. In the second market, however, they are the number two brand and the market leader has a market share 50%. In this case the relative market share would be 25%/50% = 0.5.

As you can see, in both cases their market share is 25%, but there are substantial differences in their relative market share which gives an executive a very quick read of how dominant the brand is in the marketplace.

The relative market share of 1.25 indicates that they are of the market leader and in good competitive position; whereas the relative market share of 0.5 indicates that they are a reasonably strong player up against a very dominant market leader.

As a measure against key competitors

Smaller brands in particular probably get very little value out of the formal relative market share metric, because they may not be interested in the comparison to the market leader. They would rather compare themselves directly to a competitor. Please refer to the separate article on relative market shares and direct competitors.

relative market shares against direct competitors So why is a relative market share metric of more value than an actual market share metric?

Let’s use the example of Brand D and Brand E as shown in these tables. In the first table , you can see that they are both minor brands in this market (with 6% and 4% market shares) and minor relative market shares (at 0.15 and 0.10).

However, let’s look at the next table which provides some history for these two current market shares. As you can see, Brand E is actually holding their market share steady at 4.0%, while Brand D has gained a small extra share of the market over the last six years – growing from 5.5% to 6.0% market share.

actual and relative market shares

But given that both Brand D and Brand E are relatively small players in the marketplace, they would be more  interested in tracking their performance against each other, rather than against the market leader.

As a result, the relative market share metric appears to be of greater value – where Brand D’s market share (relative to Brand E) has increased from 1.38 to 1.50 over the past six years, while Brand E’s relative market share has deteriorated from 0.73 to 0.67.

This shows that Brand E’s relative competitive position is actually weakening, despite the fact that their overall market share has stayed flat at 4.0%.

Related Topics

What is relative market share?

Relative market share and the BCG matrix

Tracking direct competitors with relative market share

Using unit or revenue relative market share?