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Market Share: a Conversion Rate in a Two-Factor Marketing Machine

Market Share: a Conversion Rate in a Two-Factor Marketing Machine. Ted Mitchell. Two-Factor Market Share Machine. Is a competitive machine that converts an input (the total sales of the industry) into an output (the sales of the firm)

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Market Share: a Conversion Rate in a Two-Factor Marketing Machine

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  1. Market Share: a Conversion Rate in a Two-Factor Marketing Machine Ted Mitchell

  2. Two-Factor Market Share Machine • Is a competitive machine that converts an input (the total sales of the industry) into an output (the sales of the firm) • Output: Firm’s Unit Sales, Q = (conversion rate, r) x (Input: Industry’s total unit sales, Qi) • Conversion rate, r = Market Share, S • Market Share, S = (Firm’s Sales, Q) /(Industry’s total sales, Qi)

  3. Two-Factor Market Share Machine • Output: Firm’s Unit Sales, Q = (market share, S) x (Input: Industry’s total unit sales, Qi) • Market share is a conversion rate in a competitive marketing machine • The machine is normally dealing with industry revenue, Ri or Industry volume, Qi as an input • Output: Firm’s Revenue, R = (market share, S) x (Input: Industry’s total revenue, Ri)

  4. Two Factors in the Model imply • Firm’s sales = market share x industry sales • Firm’s sales = Factor 1 x Factor 2 • 1) That the firm’s sales will increase if the industry’s sales grow (Factor 2: Input) • 2) That the firm’s sales will grow if the firm’s can become more competitive in the market place and increase its market share (Factor 1: conversion rate)

  5. Expansion into Three-Factor Market Share Machine • Three Stages • 1) Expand the Two-Factor model with the variable that should be made explicit • 2) Aggregate the expanded conversion rates • 3) Decompose the aggregated rates in new series of useful conversion rates

  6. Expansion of Two-Factor • Firm’s Sales, Q = Market Share x Industry sales, Qi • To include the number of close competitors, N • The number of competitors, N, is a proxy for the potential degree of competition the firm is facing • Firm’s Sales, Q = Market Share x (N/N) x Industry sales, Qi

  7. Aggregation of Conversion rates • Firm’s Sales, Q = Market Share x (N/N) x Industry sales, Qi • Firm’s Sales, Q = (Q/Qi) x (N/N) x Industry sales, Qi • Firm’s Sales, Q = (QN/QiN) x Industry sales, Qi • Large and ugly conversion rate r, QN/QiN

  8. Decomposition of Conversion rate • Decompose the Large and ugly conversion rate r, (QN/QiN) • Firm’s Sales, Q = (QN/QiN) x Industry sales, Qi • A partial decomposition • Firm’s Sales, Q = (QN/Qi) x (1/N) x Industry sales, Qi • Firm’s Sales, Q = (firm’s relative market share, Sr) x (industry’s average market share, Sa) x Industry sales, Qi

  9. Definition of Average Market Share, Sa, for the total industry • Average Market Share, Sa = 1/(number of competitors) • Average Market Share, Sa = 1/N • If there are N = 4 competitors in the market (always include your own firm) • Average market share = ¼ = 25% • Firm’s Sales, Q = (QN/Qi) x (1/N) x Industry sales, Qi • Firm’s Sales, Q = (QN/Qi) x (Sa) x Industry sales, Qi

  10. Exam question • The average market share is Sa= 20% • What is the number of competitors, N, in this market? • Average Share, Sa = 1/N • 20% = 1/N • N = 1/0.20 = 5 competitors

  11. Definition of Relative Market Share • Or Market Share Relative to the average market share. • Relative Market Share, Sr= ratio of the firm’s sales, Q, to the size of the average firm’s sales, Qa • Relative Market Share, Sr = Q/Qa • Definition of average size of the average firm’s sales, Qais the ratio of the Total Industry sales, Qi to the number of competitors, N • Average firm’s sales, Qa = Qi/N

  12. Definition of Relative Market Share • Relative Market Share, Sr = Q/Qa • Substitute Average firm’s sales, Qa = Qi/N • Relative Market Share, Sr = Q / (Qi/N) • Relative Market Share, Sr =Q x (N/Qi) • Firm’s Sales, Q = (Relative share, QN/Qi) x (average share, Sa) x Industry sales, Qi • Firm’s Sales, Q = (Relative share, Sa) x (average share, Sa) x Industry sales, Qi

  13. Using Market Share as an Ouput • Output: Firm’s Sales, Q = (Relative share, QN/Qi) x (average share, Sa) x Industry sales, Qi • Divide both sides by total Industry sales, Qi • Q/Qi =(Relative Share, Sr) x (average share, Sa) • Q/Qi = firm’s market share, S • Output: Firm’s Market Share, S = (Relative Share, Sr)x(Average share, Sa) • Firm’s Market Share, S = Sr x Sa

  14. Questions ? • on Market Share, S as a conversion factor in a two-factor competition machine creating firm’s sales. Q or R • On Relative market share, Sr, as a conversion rate in a three-factor competition machine creating the firms’ sales • Q = Sr x Sa x Qi

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