# Market Calculations

A large part of marketing includes analysing market data. This is important for marketing managers as it helps them gain more insight into their industry and competition. Market share and growth are essential measures of how well a company or a market is doing. These figures are vital for businesses operating in the industry and for companies trying to enter the market. But what exactly are market calculations? Read along to find out.

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## How to calculate market share

To understand the origins of the market share formula, we will first examine what market share means.

All businesses operate within an industry; defined as a group of companies that operate in a related field. There are many different industries, from entertainment and automotive to pharmaceutical.

By looking at a firm's market share, we try to understand how much of a particular industry (or market) is 'owned' or dominated by that one specific firm. Market share is expressed in percentages.

If a company has a large percentage of market share, it is usually an indicator of the company's success. Typically, a business with a significant market share can influence industry prices, as competitors will follow their lead. Owning a large percentage of market share can also be a problem at times, as it could signify a monopoly.

## Market share formula example

To calculate market share, we need to know the value of two variables: sales of the firm and total market sales. The firm's sales can include the total sales of one product, the sales of one brand, or sales of a service. We use the following formula to calculate market share:

$\mathrm{Market}\mathrm{Share}=\frac{\mathrm{Sales}\mathrm{of}\mathrm{firm}}{\mathrm{Total}\mathrm{market}\mathrm{sales}}\mathrm{x}100$

You are a car manufacturer. Last year you sold 100,000 cars. You know that a total of 10 million cars were sold worldwide. You want to know what your firm's market share is.

$\mathrm{Market}\mathrm{Share}\left(%\right)=\frac{100,000}{10,000,000}=0.01=1%$

Your firm's market share is 1% of the global car market.

## How to calculate market size

Two further market calculations include market size and market growth. Both of these are essential for examining market conditions.

### Market Calculation: Market size

It is essential to know the market size because it can help an organisation understand how many customers they could reach.

Market size measures the total sales generated from selling a product in a particular market. It is measured over a specified period, usually one year.

### Market Calculations: Market size formula

To calculate the market size, we need to know the value of two variables: total sales and market share.

$\mathrm{Market}\mathrm{Size}=\frac{\mathrm{Sales}}{\mathrm{Market}\mathrm{Share}}\mathrm{x}100$

Market size calculations often include estimations about the growth of a market.

We know that Company A's total sales revenue in 2021 was £550,000, and its market share is 7 per cent.

$\mathrm{Market}\mathrm{size}=\frac{£550,000}{0.07}=£7,857,143$

The market size is £7,857,143.

### Market Calculations: Market growth

Market growth measures how much a market has changed. It represents the rate at which the market is increasing (or decreasing in some cases).

It measures the percentage of change in the market between two years. Market growth is not the same as sales growth. Sales growth is the change in the number of sales between two years.

Just because sales during a certain period have increased does not mean that market share has also increased. In a growing market, sales often increase due to the general growth of the market, especially when compared to other, more stagnant markets. Increased sales do not automatically mean increased market share.

### Market Calculations: Market and sales growth formula

The following are the formulas for market growth and sales growth:

$\mathrm{Market}\mathrm{Growth}\left(%\right)=\frac{\mathrm{Change}\mathrm{in}\mathrm{market}\mathrm{size}}{\mathrm{Original}\mathrm{size}\mathrm{of}\mathrm{the}\mathrm{market}}\mathrm{x}100\phantom{\rule{0ex}{0ex}}\phantom{\rule{0ex}{0ex}}\phantom{\rule{0ex}{0ex}}\mathrm{Sales}\mathrm{Growth}\left(%\right)=\frac{\mathrm{Change}\mathrm{in}\mathrm{total}\mathrm{sales}}{\mathrm{Total}\mathrm{sales}\mathrm{in}\mathrm{first}\mathrm{year}}\mathrm{x}100$

1. The size of the market in 2019 was £1.7 million. The size of the market in 2020 is £2 million. What is the market growth rate of this market?

$MarketGrowth=\frac{£2million-£1.7million}{£1.7million}=\frac{£300,000}{£1.7million}=17.65%$

The market growth rate is 17.65 per cent.

2. In 2019, Company X's total sales were £700,000. In 2020 Company X's total sales amount to £750,000. What is the total sales growth of Company X?$SalesGrowth=\frac{£750,000-£700,000}{£700,000}=\frac{£50,000}{£700,000}=0.0714=7.14%$The total sales growth of Company X was 7.14 per cent.

## How to calculate market cap

To understand market capitalisation calculations, let's first take a look at what market capitalisation means.

Market capitalisation is important because it allows investors to see the value of one company compared to others.

Market capitalisation, often called 'market cap' or market value, is defined as the value of a company's outstanding shares.

Market capitalisation measures what a company is worth on the market. Market capitalisation calculations are made for companies that are trading publicly (public limited companies).

Take a look at our explanation of Business Ownership to find out more about public limited companies.

They help predict the company's future value, as it shows the amount of money people and organisations are willing to pay for shares in the company.

## How to calculate market value

To calculate market value, we need to know the value of two variables: the number of outstanding shares and the current share price. The market capitalisation formula is as follows:

$\mathrm{Market}\mathrm{Cap}=\mathrm{Number}\mathrm{of}\mathrm{outstanding}\mathrm{shares}\mathrm{x}\mathrm{Current}\mathrm{share}\mathrm{price}$

A public limited company has 100 shares outstanding, and the current share price of each share is £ 5,000. What is the company's market capitalisation?

Market cap = 100 x 5,000 = £500,000

The company's market capitalisation is £500,000.

## Market Calculations: Interpreting market data

Other essential market calculations include:

• Correlation

• Confidence levels

• Extrapolation

Marketing managers use these calculations to understand and interpret data during the market research process.

### Market Calculations: Correlation

Correlation occurs when there is a relationship between a dependent and independent variable. A correlation can either be negative, positive, or zero.

If a company introduces a discount on a certain product and, as a result, sales increase, the correlation between the two factors is positive (higher discount rate, higher sales). On the other hand, if the company increases the price of a product and, as a result, sales drop, it is an example of a negative correlation. Zero correlation means that two factors do not have a relationship with one another. For example, the price of coffee and bicycle sales do not correlate. These relationships can be plotted on graphs (see below).

Fig. 2. Positive, Negative, and No Correlation

### Market Calculations: Extrapolation

Extrapolation is a way of estimating future trends based on past business activity.

For example, if a business wants to know what will happen to the sales of a certain product in the future, they can look at market data on the past sales of the product. If managers can see that sales for the product have been decreasing at a rate of 1.5 per cent per year, they can estimate that it will continue to fall at a similar rate in the upcoming years. This is known as extrapolation.

### Market Calculations: Confidence levels

When conducting marketing research, researchers take samples of a population. This is because, in most cases, it is impossible to collect data on the entire population of interest. As a result, research data will not be 100 per cent accurate for the entire target population. Market research findings must have a confidence level. This reflects how certain researchers are that the data will be relevant to the target population.

A confidence level of 100 per cent would mean that if researchers repeated the same survey, they would get exactly the same result. However, this is quite unlikely.

As a result, there are various market calculations marketing managers must consider when formulating a marketing strategy. Depending on the type of market research conducted, researchers will choose the appropriate calculations to find relevant insight into the market.

## Market Calculations - Key takeaways

• Market calculations are practical tools for understanding how markets function and change.
• By looking at a firm's market share, we try to understand how much of a particular industry (or market) is 'owned' or dominated by that one specific firm. It is measured by dividing the firm's total sales by the market's total sales.
• Market size measures the total sales generated by selling a product. It is measured by dividing sales over market share.
• Market growth measures how much a market has changed. It is measured by dividing the change in market size during year one and year two by the size of the market in year one.
• Sales growth measures the changes in a company's sales. It is calculated by dividing the change in total sales over year one and year two by the total sales in year one.
• Market capitalisation is the value of a company's outstanding shares. It is measured by multiplying the number of outstanding shares by the current share price.
• Correlation occurs when there is a relationship between a dependent and independent variable. A correlation can either be negative, positive, or zero.
• Extrapolation is a way of estimating future trends based on past business activity.

#### Flashcards in Market Calculations 27

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How to calculate market share?

To calculate market share we need to know the value of two variables: sales of the firm and total market sales. Sales of the firm can include the total sales of one product, the sales of one brand, or sales of a service. To calculate market share (%), we divide the firm's total sales by the total market sales and then multiply this value by 100.

How to calculate market cap?

Market capitalisation is the value of a company’s outstanding shares. It is measured by multiplying the number of outstanding shares by the current share price.

How to calculate market size?

Market size measures the total sales generated by selling a product on a market. It is measured by dividing sales by market share. This value is then multiplied by 100.

How to calculate market growth?

Market growth measures how much a market has changed. It represents the rate at which the market is increasing (or decreasing in some cases). It is measured by dividing the change in market size during year 1 and year 2 by the size of the market in year 1. This value is then multiplied by 100.

How to calculate market value?

To calculate the market value of a firm, we need to multiply the number of shares outstanding by the current share price.

## Test your knowledge with multiple choice flashcards

If a company introduces a discount on a certain product and as a result sales increase, the correlation between the two factors is:

If a company increases the price of a product and as a result sales drop, the correlation between the two factors is:

"If a business wants to know what will happen to the sales of a certain product in the future, they can look at market data on the past sales of the product. If managers can see that sales for the product have been decreasing at a rate of 1.5 per cent per year, they can estimate that it will continue to fall at a similar rate in the upcoming years."This is an example of:

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