What is Market Share Variance?

Market share variance shows the impact of a change in market share on the profits of a business. This information can be critical when evaluating the marketing and other costs that will be incurred to create and maintain an increase in market share. If the marketing cost is not excessively high and the potential profit associated with an increase in market share is significant, then it can make sense to pursue an expansion of market share.

How to Calculate Market Share Variance

To calculate market share variance, subtract the budgeted market share percentage from the actual market share percentage, and then multiply by the total market (expressed in units) and multiply by the profit margin per unit. The profit margin per unit is usually considered the gross margin per unit, but it can also be expressed as the contribution margin per unit (which is higher). The formula for the market share variance is as follows:

(Actual market share % - Budgeted market share %) x Total market in units x Profit margin/unit = Market share variance

Problems with the Market Share Variance

There are several limitations and potential issues with relying on market share variance, which are as follows:

Limited profitability insights. Market share variance focuses solely on the proportion of total market sales, not profitability. A company could achieve higher market share by cutting prices or spending heavily on marketing, which might reduce profit margins. In other words, it can encourage a volume-driven strategy rather than one focused on profitability or sustainable growth.
Ignores changes in market size. If the total market is shrinking, a stable or even increasing market share could mask an overall decline in revenue. Conversely, if the market is growing rapidly, a stable market share could mean the company is growing but not keeping up with competitors. Market share variance on its own doesn’t reveal whether market share changes are due to a competitor’s gains or losses, market growth, or contraction.
Assumes market homogeneity. Market share variance assumes the market is homogenous, but markets are often segmented. A company might lose overall market share but gain share in a profitable or strategic segment. Market share variance doesn’t capture shifts within segments, making it less useful for nuanced insights into competitive positioning.
Short-term focus. Market share variance can lead to a short-term focus, incentivizing tactics that boost share quickly rather than fostering long-term brand loyalty or sustainable advantages. For example, aggressive discounting or promotions might temporarily increase market share but at the expense of brand equity or profitability.
Ignores impact of external influences. Market conditions such as economic downturns, supply chain disruptions, regulatory changes, or shifts in consumer preferences can affect market share. Relying on market share variance can obscure the impact of these factors, making it harder to determine whether changes in market share are due to company performance or external conditions.
Data reliability issues. Accurately measuring market share requires reliable data on the total market size and competitor sales, which isn’t always available. Variance analysis can be skewed by incomplete, delayed, or inconsistent data, especially in fragmented or rapidly evolving markets where new entrants or smaller players may not report sales.

In summary, while market share variance can indicate a company’s competitive performance in a broad sense, it has limitations that can make it misleading if used in isolation.