Monday, July 25, 2011

Market Share Models

For any business in a competitive industry, market share is an important measure of success and growth.  Market share, which is the percentage of a businesses sales to all sales in the industry, indicates how much of the overall market that business controls.  Managing market share is difficult as it not only depends upon an individual businesses sales growth, but also the growth of competitors and the size of the overall market.  The latter two factors are generally beyond the control of the individual business. 

There are a number of factors that are in control of an individual business, however.  These include, but are not limited to: marketing and sales spend allocation, product prices, products offered, product quality, location, etc.  Factors that are not in control of an individual business, but yet still influence market share are: number of competitors, the presence of imitation products, number of years in the market, etc.

Given the number of internal and external factors that can influence market share, improving market share is a costly and complex endeavor.  One tool that can support this effort is a statistical model that helps determine the factors necessary to achieve specific market share goals.  While a tool such as this still relies on the professional judgement of the business line manager, it will help recommend the specific business decision that could lead to desired outcomes.  Statistical models such as this are based on historical results and evaluate not only the impact of each factor on market share, but also how the interaction between factors can influence market share in different ways.  In other words, market spend in one location may have more influence on market share than market spend in another location.

One especially competitive industry where models likes these have a benefit is in pharmaceuticals.  The sample model displayed below illustrates how market share for an individual company's drug can be evaluated across a number of factors that are both in and out of the company's control.  These factors include the size of the drug class to all drug classes in the market (class share), the number of competitors, the price per pill, the presence of generics, whether the drug is sold in the US market, the years on the market, the percent of spend on sales, and total spend.

The factors in the model above can be adjusted for the drug in question to determine expected market share.  Factors such as price per pill, and sales spend would be in control of a pharmaceutical company, and thus would directly affect market share.  The model also allows multiple market share scenarios for the same drug such that the relative impact of factors can be evaluated.  The relative difference between the two scenarios is represented with the odds ratio - this statistics determines how many times greater scenario 1 market share is is to scenario 2 market share.

While this particular model is somewhat simplistic, it illustrates how internal and external factors can influence market share, and how these factors can be leveraged to model potential market share outcomes.

No comments:

Post a Comment