What Relative Market Share Is and How to Calculate It

By Indeed Editorial Team

Published April 20, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Understanding how a business is performing compared to its competitors can help guide growth strategies and influence potential investors. The relative market share (RMS) measures what portion of a market a business has captured compared to its biggest rival. Learning how to calculate the RMS can help you compare different businesses and assess their potential for future growth. In this article, we define the RMS, explain why it's important, compare RMS and absolute market share, give steps for calculating RMS, and share example calculations.

What is the relative market share?

The relative market share identifies the share of a specific market that a business possesses when measured against its largest competitor. It's generally expressed as a percentage value. You can use RMS to compare companies, individual departments, or specific products. RMS can show that a company has plenty of growth potential relative to its largest rival, and can demonstrate that an individual product is succeeding in its market. By comparing a company's market share with that of its largest competitor by calculating the RMS, you can understand where a company stands within its industry. The formula for calculating the RMS is:

RMS = (company's market share/biggest competitor's market share) × 100

Relative market share vs. absolute market share

The absolute market share reveals what percentage of a given market a business occupies. You can calculate the absolute market share using this formula:

Absolute market share = (company revenue/total market size) × 100

For example, if an automobile manufacturer were to take 10 billion dollars in revenue, and the total automobile manufacturing market size was 100 billion dollars, then that automobile manufacturer would have a 10% absolute market share. The absolute market share shows how a company performs compared to its industry as a whole. Once you know a company's absolute market share, you can calculate the RMS to compare it with its largest competitor. Both calculations indicate how a company performs in comparison with other businesses.

Importance of RMS

There are several reasons why companies calculate the RMS. Here are some of the most significant reasons to use this calculation:

Considering the competition

RMS allows you to compare a business to the largest, most successful competitor that operates in the same field. This can show if a business is competitive and can reveal how far a business is from becoming the market leader. The strongest competitor in a specific market can have a large impact on how other businesses operate. It might set prices, influence consumers, and drive innovation. Comparing a business to its largest rival can help determine business strategy and inspire management to make positive changes.

Related: What Is a Differentiation Strategy? (With Benefits and Tips)

Developing product strategies

You can use the RMS to determine how a business' different products compare with those manufactured by the industry leaders. These calculations can help you determine which products are most successful, how they compare with those of industry leaders, and what adjustments might be necessary to increase market share in the future. The RMS helps reveal how individual products perform within their market and can help a business identify those that can benefit from increased marketing and sales efforts.

Related: What Is Market Positioning? How to Develop a Strategy

Guiding decision-making

RMS calculations can help a business understand its place within the larger market and develop strategies for the future. If a business realizes it's gaining market share compared to its largest competitor, it might decide to lower prices and increase marketing efforts to gain more market share and potentially surpass the other business. You can analyze the performance of the business as a whole and individual product lines to optimize strategies for growth and increase market share.

Related: What Are Decision-making Skills and How to Improve Them

Attracting investors

Investors use RMS calculations to understand the strength of a company in comparison to its competition. If a company has healthy sales growth but a low RMS, it might suggest that there's room for growth. If there are strong industry leaders, it may indicate that it's difficult for other companies to compete in the same sector. Investors can make more effective decisions about a company by using RMS calculations to evaluate individual products and the overall business.

How to calculate the RMS

Most of the information necessary to calculate the RMS is easily accessible within a company's financial records. Here are steps to follow to calculate the RMS:

1. Specify the calculation

You can calculate the RMS for a business, a specific product, or a product category. You can also adjust the time frame of your calculation to track market share over a certain period. Before you calculate the RMS, determine the kind of information for which you're looking. If you want to determine how a particular product is performing relative to others within its sector, you can calculate the RMS of that specific product. To see how a business is performing against its strongest competition, you can calculate its overall RMS.

2. Calculate the market share

Calculate a business' market share by noting its revenue and then determining the total revenue of the industry the business operates in. If you're calculating the market share of a product, determine the amount of revenue that product generates, and then find the total amount of revenue generated by all products within that category. A business usually reports the revenue it generates in its quarterly financial records. You can usually find the total revenue generated within a certain industry in economic publications, government reports, or industry journals.

3. Calculate the largest competitor's market share

Once you know the market share of a particular business, research its competitors and determine which has the highest revenue. Then calculate the market share of the largest competitor by dividing its revenue by the total revenue within the industry and multiplying by 100. You can find the revenue of the largest competitor in their public quarterly financial records. The largest competitor within an industry can change over time, so make sure your figures are up to date.

4. Calculate the RMS

Once you know the market share of a business and its largest competitor, you can calculate the RMS. The formula for finding the RMS is:

RMS = (company's market share/biggest competitor's market share) × 100

Calculations return a percentage that represents how large a company's market share is in comparison with that of its largest competitor. If the percentage is a low number, it demonstrates that the business has a small market share relative to its competition. If the percentage is close to 100, it indicates that the business is quite close to overtaking its competitor.

5. Continue calculating

The RMS is most effective when you calculate it multiple times and determine if it's increasing or decreasing over time. Try to perform RMS calculations for a business as a whole and for specific products. This can give you an insight into which products are performing best and which ones might benefit from further marketing. Try to ensure that all the figures you use in your calculations are current and accurate. You can use RMS calculations to develop strategies to compete with industry leaders.

Examples of RMS calculations

There are many ways to use RMS calculations to compare businesses or products. Here are two examples of RMS calculations:

Example 1

Phil wants to invest in a construction company, but he's not sure about its strength compared to other companies in its industry. He decides to calculate its RMS to determine if it's a sound investment. The construction company earns 500 million dollars in revenue, and the total revenue of all construction companies is 20 billion dollars. The largest competitor in the sector earns 2 billion dollars in revenue. First, he calculates the market share of the construction company:

Market share = (company revenue/total market size) × 100&

Market share = (5000000000/20000000000) × 100

Market share = 2.5%

The construction company has a 2.5% market share. Next, he calculates the largest competitor's market share:

Competitor's market share = (2000000000/20000000000) × 100

Competitor's market share = 10%

Now that he knows the market share of the company and its largest competitor, he can calculate the RMS:

RMS = (company's market share/biggest competitor's market share) × 100

RMS = (2.5/10) × 100

RMS = 25%

The RMS of the construction company is 25%. This indicates that it has a small share of the market compared to its largest competitor, which might suggest a potential for growth.

Example 2

Sean is a marketer assigned to grow the market share of a shoe company's primary brand of sneakers. He calculates the RMS of the sneaker brand to see how it compares with its competition. The total revenue of the sneaker brand is 100 million dollars. The total revenue of all sneaker brands is 1 billion dollars. The revenue of the largest competing brand is 500 million dollars. Sean uses market share calculations and determines that the sneaker brand has a 10 percent market share, and the largest competitor has a 50 percent market share. Now he can calculate the RMS:

RMS = (company's market share/biggest competitor's market share) × 100

RMS = (10/50) × 100

RMS = 20%

The sneaker brand has a 20% market share. Sean can consider designing an innovative advertising campaign to increase consumer interest and attempt to increase market share.

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