The primary objective of any business is to grow, be it organically or through other methods, such as seeding or acquisitions.
Overall, the competition in the supply chain is getting tighter which imposes a major challenge for a logistics company. Therefore, successful business leaders should keep track of their position within this “race” — and the best way of doing that is by measuring their market share.
This metric allows business owners to understand where their business is situated in comparison to their competitors. But its true value comes when combined with other growth indicators (especially the ones related to revenue), like ROI (Return Over Investment), net and pretax profit, and marketing-to-sale costs.
In this article, we’re going to take a deep dive into how logistics companies can measure and analyze their market share. Also, we will teach you how to gather the information to calculate and increase it.
- What is market share?
- Why is knowing its market share important for a logistics company?
- How to measure market share
- How does the market share relate to profit?
- How can a logistics company increase its market share?
- Using new technologies
- Customer retention
- Optimal talent recruiting
- Capturing investments and M&As
What is market share?
Market share is the percentage of total sales by a company in its particular line of business. It is measured by dividing the business’ total sales by the industry’s, over a specific period of time.
For a logistic provider, measuring market share might be a little different, as the cash flow is recurring and you’re not selling any products. So, instead of the total value of units sold, the recommended reference is the revenue associated with the number of clients/shipments (don’t worry, we’ll share some examples below).
Using this KPI, entrepreneurs can have an idea of their own company’s performance in comparison to its competitors. Therefore, the one with the bigger slice has the right to call themselves the “market leader”.
But the importance of measuring your market share goes beyond bragging about it, though.
Studies show that market share has a direct correlation to profit. So, if you want to grow your business, measuring the variation of your company’s market share regularly and objectively is a must.
Why is knowing your market share important for a logistic company?
This level of awareness, combined with the estimated size of your market, can be used to create campaigns, reevaluate your pricing and conduct qualitative research in order to get product/service discoveries – all compared to your competitors.
Also, the market share can help you identify information about these two fronts: customer perception and investor analysis.
In the first one, there is a simple connection. The more your services are widespread in the market, the more you can assume your leads are aware of your product. And this is a MAJOR advantage when it comes to selling and prospecting. Let us explain!
- First, there is an organic flow of information sharing among the users and their peers. Mouth-to-mouth leads like these are easier to sell to and more likely to give you good reviews.
- Secondly, you gain a headstart to convert clients, because different from other companies, that need to do indirect approaches, share stories and present themselves, you can focus on more direct communication about your offers, services, and benefits.
- Finally, even if you are not paying much attention to it now, we can guarantee that investors are. If you are looking to get funded shortly, you have to follow your market share, aligned with the potential you have to grow through your services and innovative ideas.
Read also: 6 Sales Prospecting Mistakes Freight Forwarders Make (And How To Avoid Them)
How to measure market share?
The formula to calculate the market share is somewhat simple:
Market Share = Total Company Sales / Total Industry Sales
As we explained, if you are a logistic company, you can change the value from total units sold to number of clients/shipments. Still, it will probably follow the same steps to measure it below:
- Filter your calculation: choose the limiting filters to what and how you will calculate your market share, like the period of the analysis, the geographical range, if you want to know your share of revenue or clients and any other limiter that you understand is viable.
- Calculate your data: before entering the formula, be sure that your data is veritable. For a logistics company, as an example, add the revenue from a specific model of storage or shipping you offer over a predetermined period (always taking off quantities that can distort it, like other streams of revenue and complementary services).
- Calculate market data: now, to the other amount, that is the total revenue generated from your market. There are tech solutions currently in the market that help you with it, without having to visit and crawl manually through official organizations and government databases.
- Apply the formula: finally, all you have to do is to divide your data (total sales revenue, total units sold or number of active clients) by the industry amount. Multiply it by 100 and that’s it, you have your market share percentage.
Example
Nothing is better than an example to put into practice. Let’s consider that a fictional logistics company, Logistics A, wants to find out what is their market share amongst companies that offer dry storage containers around the US:
- Logistics A total revenue from dealing with dry storage over the last 12 months: U$ 20.000.000.
- The industry’s overall dry storage transaction values over the last 12 months: U$ 400.000.000.
By applying the formula we mentioned before, it happens goes like this:
Market Share = Total Company Sales / Total Industry Sales
Market Share = 20.000.000 / 400.000.000
Market Share = 0.05 x 100
Market Share = 5%
Note that this is just a fictional example, with round and estimated numbers. When applying to your reality, every cent and comma matters to get the true value of your market share.
Read also: How To Find Foreign Buyers For Your Exports
How does market share relate to profit?
Now that we covered the how-to’s in the market share subject, we can do a deep dive. This is quite necessary since this KPI directly relates to many others like profit margins and marketing & sales spendings.
According to the PIMS (Profit Impact of Market Strategy), one of the most complete studies about which business strategies lead to success or failures has identified a pattern between the companies’ market shares and their Return Over Investment (ROI). As the slice owned by a business was bigger, their ROI reached significantly higher margins.
For example, while companies with a market share under 10% averaged less than 10%, those that reached a slice of 40% made an ROI close to 30%.
But this is not all. As we just said, there is a correlation between the profit margin and the market share, and the difference between business results was way more impressive.
Per the same PIMS study, the pretax-profit-to-sales ratio in companies with less than 10% of penetration in their industry was -0.16, meaning that they lost money. As the market share increased, though, the same ratio escalated exponentially: 10%-20% (3.42); 20%-30% (4.84); 30%-40% (7.60); over 40% (13.16).
Overall, there are three possible reasons why the market share goes along with a company’s ability to earn more money:
- Economies of scale: it is a simple comparison. A business with a large market share is bigger than one with less, and that leads to the assumption that they have achieved a larger scale and return for costs over procurement, manufacturing, marketing, and other components.
- Market power: for many economists, the sheer size of a business isn’t enough to justify the higher profit. Instead, they suggest that the ability to earn more than smaller competitors comes from the market power derived from their share. That’s why they can bargain better prices with providers and manage price ranges from cheap to very high-priced products.
- Quality of management: this one comes from the notion that the successful gain in market share is achieved through good management. Such entrepreneurs are capable of skillfully controlling costs, increasing productivity and finding innovative opportunities within their industry.
How can a logistics company increase its market share?
As with many facets of the business world, there isn’t a sure way to get a bigger slice of the market. Still, there are a few broad topics that will help you formulate your strategy:
- Using new technologies
- Customer retention
- Optimal talent recruiting
- Capturing investments and M&As
Below, you can understand each of these topics in detail:
Using new technologies
Using the latest tools is something that should be in your action plan, as innovation is a method that may help you increase your market share.
Remember the improving management quality argument above? New technologies are imperative to achieve it, since they have a direct impact to help reduce time spent in repetitive processes and bureaucracy and automate tasks.
Take strategic information gathering, for example. Even with skillful data engineers working with you, crawling and organizing through public or publicly available databases is not ideal. Right now, there are useful data analysis tools that help you perform this job and also prospect new clients to grow your market share.
Customer retention
Tightening the ties with your customers is a great way to strengthen your brand. Not only will it prevent those clients from buying from your competitors, but it’ll also be more likely for them to speak well of your products and services.
This helps to create word-of-mouth prospects. These are organic leads more prone to convert, since they received a referral from a trusted peer who has obtained success with your service.
Optimal talent recruiting
To grow your market share, you need the right people to support you. That is why optimal talent recruiting is a must. Focus on the core competencies of the different areas you’re fulfilling, with competitive salaries and benefits. A well-rounded people attraction and retention strategy is useful to reduce expenses related to turnover and training.
Capturing investments and M&As
The market share itself is a fundamental indicator to show to possible investors. By gathering funds, in accordance with your deal with the stakeholders, you can reinvest this money in your business to continue growing your market share.
One of the uses of that money for this purpose is another business acquisition, especially competitors. In doing so, you reduce the number of players fighting the same slice and access their customer base.
