There are many factors an investor evaluates when deciding whether or not to invest capital into a company. Little or no growth potential is typically a deal breaker for any investor. Questions like the following are asked:
- Does your company operate in a large enough market to scale the business?
- Has your company already captured a majority of the industry’s market share?
Basically, investors want to understand is there room for growth. Calculating market share is somewhat of a subjective task. An entrepreneur who has a thorough understanding of the market in which their company operates is attractive to investors. Below are a few ways to view market share:
Share of unit sales: The manager of Open Fairways Golf Course discovers that all the courses in the market area together host 50,000 rounds of golf a year. Of those rounds, Open Fairways hosts 7,000, for a 14 percent market share. (7,000 ÷50,000 = 0.14)
Share of customers served: The owners of Immaculate Carpet Cleaning serve homes within 15 miles of the business. That area includes 2,000 homes. However, the Immaculate owners estimate that only half of the area’s homes — 1,000 homes — are potential customers for carpet-cleaning services. The company currently cleans carpets in 125 homes a year, giving it a 12.5 percent market share. (125 ÷1,000 = 0.125)
Share of dollar volume: The owners of Forever Green Landscaping operate in a market area where homeowners and businesses buy a million dollars worth of landscaping services annually. Forever Green has sales of $100,000, or 10 percent market share. (100,000 ÷1,000,000 = 0.10)
Calculating market share accurately allows the management team to set achievable goals toward growth. Operating blindly within your market is a recipe for disaster.