Market share, growth, and price elasticity
Is a company winning or just riding a growing market? And what happens to revenue when price changes?
Key takeaways
- A company can grow and still be losing ground: always compare its growth with the market's growth, and when price changes, check how much the quantity sold changes too.
- Common mistakes: Saying "sales are growing, so all is well" without checking the market.
- Market share is a company's sales divided by the sales of the whole market.
Key idea
A company can grow and still be losing ground: always compare its growth with the market's growth, and when price changes, check how much the quantity sold changes too.
Market share is a company's sales divided by the sales of the whole market. Relative market share compares your share with that of your largest competitor: 30 percent against a leader with 40 percent is a relative share of 0.75. If a company grows faster than its market, it gains share. If it grows slower, it loses share, even while its sales go up.
Worked case
Growing, but losing share
The prompt
The mobile phone accessories market in the UAE grew from AED 10 billion to AED 11 billion. Our client grew from AED 2 billion to AED 2.1 billion. Is the client doing well?
The structure
- Compare client growth with market growth, then check share
- Market growth and client growth
- Market share before and after
Working it through
1. Market growth
From 10 to 11.
Market growth (percent):(11 - 10) ÷ 10 × 100 = 102. Client growth
From 2 to 2.1.
Client growth (percent):(2.1 - 2) ÷ 2 × 100 = 53. Share before
2 out of 10.
Share before (percent):2 ÷ 10 × 100 = 204. Share after
2.1 out of 11.
Share after (percent):2.1 ÷ 11 × 100 = 19.09
The recommendation
No, the client should not read 5 percent growth as success, because the market grew 10 percent, twice as fast. As a result, its share fell from 20 percent to about 19 percent, which means competitors are taking ground. The risk is that the gap widens every year if the cause is lasting, such as a weaker product range or lost shelf space. As a next step, compare the client's growth with the market by product and channel to find where share was lost.
Price elasticity in plain words
Price elasticity tells you how strongly buyers react to a price change. Divide the percentage change in quantity by the percentage change in price. If the result is bigger than 1 (ignoring the minus sign), demand is elastic: buyers react strongly, and raising the price lowers revenue. If it is smaller than 1, demand is inelastic: buyers react little, and raising the price raises revenue. Everyday goods with few substitutes, such as basic medicines, tend to be inelastic. Goods with many close substitutes, such as one brand of snack, tend to be elastic.
Worked case
A cinema raises its ticket price
The prompt
A cinema in Spain raises its ticket price from EUR 10 to EUR 11. Weekly tickets sold fall from 1,000 to 850. Was the price rise a good idea for revenue?
The structure
- Compare revenue before and after, and calculate the elasticity
- Revenue = price x tickets
- Elasticity = percent change in tickets / percent change in price
Working it through
1. Revenue before
EUR 10 times 1,000 tickets.
Weekly revenue before (EUR):10 × 1,000 = 10,0002. Revenue after
EUR 11 times 850 tickets.
Weekly revenue after (EUR):11 × 850 = 9,3503. Elasticity
Tickets fell 15 percent after a 10 percent price rise.
Price elasticity:-15 ÷ 10 = -1.5
The recommendation
No, the cinema should not keep the EUR 11 price on revenue grounds, because weekly revenue fell from EUR 10,000 to EUR 9,350. The reason is elastic demand: a 10 percent price rise cut tickets by 15 percent, an elasticity of about 1.5. The risk is that the loss is larger than it looks, since fewer visitors also buy fewer snacks. As a next step, compare weekly profit at both prices, including snack sales, before deciding whether to return to EUR 10.
A brand raises its price 5 percent and loses 2 percent of its volume. By about what percent does revenue change? (Use one decimal place.)
Saying "sales are growing, so all is well" without checking the market. Mixing up percent and percentage points when share changes (20 to 19 percent is a fall of 1 point, or about 5 percent). Assuming a price rise always raises revenue. Forgetting that competitors may react to a price change.
Our sales grew 8 percent. The market grew 12 percent. What happened to our market share?
Demand for a product is inelastic. What happens to revenue if the price rises a little?
Our share is 20 percent. The market leader has 40 percent. What is our relative market share?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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