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Market Calculations

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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 market growth provide essential measures of how well a company or a market is doing. These figures are important for businesses operating in the industry and for businesses trying to enter the market to acknowledge. But what exactly are market calculations?

Market share

In order to understand the origins of the market share formula, we will first take a look at 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 types of industries, ranging from entertainment and automotive to pharmaceutical.

By looking at a firm's market share, we try to understand how much of a certain 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 large 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 be a sign of a monopolistic market.

Market share formula

In order 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.

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.

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

Market size and growth

Two further market calculations include market size and market growth. Both of these are very important.

Market size

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

The reason why it is important to know the market size is that it can help an organisation understand how many customers they could potentially reach.

Market size formula

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

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 their market share is 7 percent. The market size is £7,857,143.

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 amount 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 growth and sales growth formula

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

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?

The market growth rate is 17.65 percent.

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?

The total sales growth of Company X was 7.14 percent.

Calculating market capitalisation

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

What is market capitalisation?

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

Market capitalisation, often called 'market cap', 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). They help predict the future value of the company, as it shows the amount of money people and organisations are willing to pay for shares in the company.

Market capitalisation formula

To calculate market capitalisation we need to know the value of two variables: the number of outstanding shares, and current share price. To calculate the market capitalisation, you need to multiply the number of shares outstanding by the current share 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?

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

Interpreting market data

Other important market data calculations include:

• Correlation

• Confidence levels

• Extrapolation

These calculations are used by marketing managers to understand and interpret data during the market research process.

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, 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).

Positive, negative, and zero correlation. StudySmarter

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 percent per year, they can estimate that it will continue to fall at a similar rate in the upcoming years. This is known as extrapolation.

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 is not going to be 100 percent accurate for the entire target population. Market research findings must have a confidence level. This reflects how certain researchers are that the data is going to be relevant to the target population.

A confidence level of 90 percent means that researchers are 90 percent sure that their findings are relevant to and representative of the target population.

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

Market Calculations - Key takeaways

• Market calculations are effective tools for understanding how markets function and change.
• Market share is measured as a percentage, and it is the amount of an industry that is earned by a particular company over a specified time period. It is measured by dividing the total sales of the firm by the total sales of the market.
• Market size measures the total sales generated by selling a product on a market. It is measured by dividing sales over market share.
• 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.
• Sales growth measures the changes in a company's sales. It is calculated by dividing the change in total sales over year 1 and year 2 by the total sales in year 1.
• 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.
• Market research findings have a confidence level, as the data that has been collected is, most likely, not going to be 100 percent accurate for the entire population.

Market Calculations

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 (percentage) we divide the total sales of the firm by the total market sales and then multiply this value by 100.

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.

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

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.

Final Market Calculations Quiz

Question

What is market share?

Through market share, we try to understand how much of a certain industry (or market) is 'owned' or dominated by one specific firm. Market share is defined as the “percentage of an industry, or market's total sales, that is earned by a particular company over a specific time period”. If a company has a large percentage of market share, it is usually an indicator of the success of that company.

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Question

What is an industry? And what is an example of an industry?

All businesses operate in an industry. An industry is a group of companies that operate in a related field. There are many different types of industries, ranging from entertainment to automotive to the pharmaceutical industry.

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Question

How do you 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 total sales of the firm by the total market sales and then multiply this value by 100.

Show question

Question

You are a car manufacturer. Last year you sold 250,000 cars. You know that a total of 10 million cars were sold worldwide. What is your market share?

Market share = (250,000 / 10,000,000) x 100 = 2.5%

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Question

Your firm's market share was 10 percent last year and your total sales to £3,300,000. What was the value of total market sales?

0.1 = (£ 3,300,000 / x), x = £ 33,000,000

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Question

What is market size?

Market size measures the maximum total number of sales your business can potentially sell its product to. It is measured over a specified period, usually one year. Market size measures the total sales generated from selling a product in a certain market.

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Question

How do you calculate the market size?

Market size measures the total sales generated by selling a product on a market. It is measured by dividing sales over market share.

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Question

What is 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.

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Question

How do you calculate market growth?

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.

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Question

How do you calculate sales growth?

Sales growth is calculated by dividing the change in a company's sales during years 1 and 2 by the company's sales in year 1. This value is then multiplied by 100.

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Question

The size of the market in 2016 was £3.2 million. The size of the market in 2020 is £5 million. What is the market growth rate of this market?

Market growth = ((5-3.2) / 3.2) x 100 = 56.25%

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Question

We know that the market size in 2016 is £3.2 million. It is estimated that the market will grow by 15 percent over the next year. What will be the size of the market in 2017?

Market size in 2015 = £3.2 million x 1.15 = £3.68 million

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Question

What is market cap?

Market capitalisation, often called 'market cap', is defined as the value of a company's outstanding shares. Market capitalisation is important because it allows investors to see the value of one company compared to others. Market capitalisation measures what a company is worth on the market.

Show question

Question

How do you 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.

Show question

Question

A public limited company has 1,000 shares outstanding and the current share price of each share is £85,000. What is the company's market capitalisation?

Market cap = 1,000 x 85,000 = £ 85,000,000

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Question

Define correlation.

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

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Question

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

positive

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Question

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

negative

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Question

Describe zero correlation with an example.

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.

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Question

What is extrapolation?

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

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Question

"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:

extrapolation

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Question

The confidence level reflects _______ .

The confidence level reflects how certain researchers are that the data is going to be relevant to the target population.

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Question

A confidence level of 90% means that:

researchers are 90% sure that their findings are relevant to and representative of the target population

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Question

Owning a large percentage of market share could be a sign of a _____ .

monopolistic market

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Question

Market share is expressed in:

percentages

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Question

True or false? Market size is measured over a specified time period, usually one year.

True

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Question

True or false? To calculate market size we need to know the value of three variables: total sales, market share and market capitalisation.

False

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