What is Relative Market Share (RMS)?
Relative market share indexes a firm’s or a brand’s market share against that of its leading competitor.
Market concentration, a related metric, measures the degree to which a comparatively small number of firms account for a large proportion of the market.
These metrics are useful in comparing a firm’s or a brand’s relative position across different markets and in evaluating the type and degree of competition in those markets.
This indicates likely cash generation, because the higher the share the more cash will be generated. As a result of ‘economies of scale’ (a basic assumption of the BCG Matrix), it is assumed that these earnings will grow faster the higher the share.
Calculation of RMS (I)
Relative Market Share (I) (%) = Brand’s Market Share /Largest Competitor’s Market Share
Significance of Market Share Ratio
The exact measure is the brand’s share relative to its largest competitor. Thus, if the brand had a share of 20%, and the largest competitor had the same, the ratio would be 1:1.
If the largest competitor had a share of 60 %; however, the ratio would be 1:3, implying that the organization’s brand was in a relatively weak position.
If the largest competitor only had a share of 5 %, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flows. If this technique is used in practice, this scale is logarithmic, not linear.
On the other hand, exactly what is a high relative share is a matter of some debate. The best evidence is that the most stable position is for the brand leader to have a share double that of the second brand, and triple that of the third.
The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flow. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective.
Reasons to increase Market share
Market Share often is associated with profitability and thus many firm seeks to increase their sales relative to competitors. Here some specific reasons are given that a firm seek to increase its market share.
- Economies of scale: Higher sales volume can be instrumental in developing a cost advantage
- Sales growth in stagnant industry: When the industry is not growing, the firm still can grow its sales by increasing its market share.
- Reputation: Market leaders have clout that can use to their advantage
- Increased bargaining power: a large player has an advantage in the negotiations with suppliers and channel members