What is meant by Market Size?
Market Size is the total market potential of a particular product or service that exists in the market across a given period. It is the maximum revenue that can be generated as a result of the sales revenue generated by the particular product.
Calculating the market share of a particular product is critical for organizations because it allows companies to estimate the potential revenue before they enter the market.
Using this, they can then compare the product’s features with their existing competitors and estimate the possible market share that can be achieved due to sales from the product.
Hence, market size tends to be an essential metric that helps the management of companies evaluate the market conditions, based on which they can decide the way forward and establish a more excellent footing in the market.
Therefore, it can be seen that market size is the total potential of the mar
et, in terms of the revenue that can be generated as a result of sales of the product.
What is Market Share?
Market Share is the chunk of the market size that the company has captured. It is the percentage of the sale generated in the company with respect to the overall deals in the industry of the particular product.
In other words, it is the ratio of the sales that a company generates, expressed as a percentage of the total sales revenue of the industry.
Market share is a valuable metric that helps companies measure the company’s size of the entire industry.
Therefore, it hints at how the company is a market leader. Higher market shares represent more significant sales revenue and, therefore, more excellent market leadership and dominance.
Market Share is calculated using the following formula:
Market Share = Sales Revenue generated by the company / Total Sales of the industry
The formula above renders the market share captured by a given organization.
For example, let’s assume that Hico Ltd. had sales of $1,000,000 in the year ended 31st December 2020.
The total sales of the industry, however, were $10,000,000. Therefore, the market share of Hico Ltd. can be calculated as follows:
Market Share = Sales Revenue generated by the company / Total Sales of the industry
Market Share = $1,000,000 / $10,000,000 = 10%
This means that Hico Ltd. has captured 10% of the market, whereas other players in the market own the remaining 90%.
Market Size Variance
Market Size Variance is a formula that companies use to show the impact of market size movement on the company’s net profit while the market share remains the same.
The variance that is calculated can be both positive and negative. This is essential because the market size can increase or decrease based on several different factors.
Market Size Variance Formula
Market Size Variance can be calculated using the following formula:
Market Size Variance = (Actual Market Size – Expected Market Size) * Market Share x Profit Margin per unit
Since this ratio measures the impact of changing market size, the market share is assumed to be constant. It captures the impact of change in market size on the company’s overall profitability.
Example of Market Size Variance
The concept of market share variance is illustrated in the following formula:
Hico Ltd. has a 10% market share in an industry that is estimated to be sized at $10,000,000. However, the market size has increased to $15,000,000. The profit margin per unit that Hico Ltd. earns is $50.
In the example mentioned above, it can be seen that market share variance can be calculated as follows:
Market Size Variance = (Actual Market Size – Expected Market Size) * Market Share x Profit Margin per unit
Market Size Variance = ($15,000,000 – $10,000,000) * 10% x $50
Market Size Variance = $25,000,000
Market Share Variance
Market Share Variance is a formula that companies use in order to show the impact of change in market share on the profits of the business if the market size remains the same.
This information is critical from the company’s perspective, primarily because it helps companies evaluate marketing and other related expenditures that might be incurred to increase the market share.
Market Share Variance Formula
Market Share Variance can be calculated using the following formula:
Market Share Variance = (Actual Market Share – Expected Market Share) * Market Size in units x Profit Margin per unit
Since this particular ratio measures the impact of changing market share, the market size is assumed to be constant. It captures the impact of change in market share on the company’s overall profitability.
Example of Market Share Variance
The concept of market share variance is illustrated in the following formula:
Hico Ltd. has a 10% market share in an industry that is estimated to be sized at 1,000,000 units. However, the market share of Hico Ltd. is expected to increase to 20%. The profit margin per unit that Hico Ltd. earns is $50.
In the example mentioned above, it can be seen that market share variance can be calculated as follows:
Market Share Variance = (Actual Market Share – Expected Market Share) * Market Size in units x Profit Margin per unit
Market Share Variance = (10% – 20%) * 1,000,000 x $50
Market Share Variance = -$5,000,000
Shortcomings of Market Share Variance
Even though market share variance is a resourceful metric that companies adopt to get a deeper insight into the market share variance, it can be seen that there are some shortcomings regarding this ratio that need to be accounted for. These shortcomings are as follows:
- Competitors might react adversely to gain market share, which results in higher costs or lower profit margins.
- The amount of market share that will increase followed by marketing spend at a specific volume might be challenging to predict.
Market Size Variance versus Market Share Variance – differences in application
Both market size and share variances play off one another in a very distinguished manner.
Market Size variance helps organizations determine whether the market share variance comes from the company or the market itself. However, it is essential to understand that these methodologies address different things.
Market share variance looks exclusively at the change in the company’s or organization’s percentage of the market. On the other hand, market size variance examines the relationship between the company’s market share and the resulting change in revenue in case the market size changes.
