Market Size and Market Share Variance

Market Size

Market Size is the total potential purchase of one particular product or service in the market over a given period of time.  It is the maximum of the company’s revenue if it can get 100% of the market share.

Calculating the market size is very important as it will allow the company to estimate the potential revenue before entering the market. They can compare their products’ features with existing competitors and estimate the possible market share. It helps management to decide whether to join the market or not. Besides that, market size also helps management to set the maximum budget to be invested. In order to have obtained budgeted profit, they need to estimate revenue and expenses. Budgeted expenses can be calculated by deducting the expected profit from the expected sales.

Market Share Variance

Market Share is the sale of one company can generate as the percentage of total sales in the industry. We simply take the company’s total sale and divided it over the industry sale in the same period to calculate the market share. It will help us to measure the company size in relation to the whole industry. The one with the highest market share is the market leader.

Market Share Variance shows the impact of market size movement on the company’s net profit while the market share remains the same. The variance can be both positive and negative as the market size can increase or decrease base on different factors.

Market Share Variance Formula = (Actual Market Size – Expected Market Size) * Market Share x Profit Margin per Unit

Market Share Variance Example

For example, the company has a 20% market share of the whole industry and the profit margin is $ 50 per unit. At the beginning of the year, we expect that the market size is $ 200,000. However, the actual market size has increase to 250,000 due to economic growth.

Market Share Variance = (250,000-200,000) x 20% x $ 50

= 50,000 x 20% x $50 = $ 500,000