Share of Market (SOM)

Share of Market (SOM), more commonly known as Market Share, is a straightforward yet powerful metric that tells you what percentage of a specific market's total sales a company commands over a given period. Think of an entire industry's sales as a giant pizza; a company's SOM is the size of its slice. For example, if the total European smartphone market had sales of €100 billion last year, and Apple sold €40 billion worth of iPhones, Apple's SOM would be 40%. This figure is a fundamental starting point for any investor trying to understand a company's position within its competitive landscape. It immediately answers the question: “How big of a player is this company in its field?” A high or consistently growing SOM often signals a healthy, competitive business that customers prefer over its rivals.

At its core, SOM is a measure of competitive strength. A company with a dominant market share is often the “king of the hill” in its industry. This dominance is a cornerstone of the value investing philosophy because it frequently points to the existence of a durable competitive advantage, what Warren Buffett famously calls an “economic moat.” A wide moat protects a company's profits from competitors, just as a real moat protects a castle from invaders. A large SOM can grant a company significant benefits that reinforce its position:

• Economies of Scale: Larger companies can produce goods more cheaply, buy raw materials in bulk at lower prices, and spread marketing costs over a larger sales base. This allows them to either lower prices to gain even more share or enjoy higher profit margins.
• Brand Power: The leading company often becomes synonymous with the product itself (think Google for search or Kleenex for tissues). This brand equity is a powerful asset that makes it the default choice for many consumers.
• Pricing Power: Market leaders often have more flexibility to raise prices without losing a significant number of customers, leading to healthier profits.

For a value investor, SOM is not just a number; it's a story about a company's relationship with its customers and competitors. The trend in SOM is often more revealing than the absolute number. A company steadily increasing its share from 10% to 15% in a competitive field is often a more exciting prospect than a lazy monopolist with a 70% share that is slowly eroding.

A consistently high or growing SOM is one of the clearest signs of a strong economic moat. The source of that moat can often be diagnosed by looking at why the company holds its share:

• Is it high switching costs? For example, a business is unlikely to move its entire payroll and accounting system from one software provider to another just to save a little money. The dominant player holds its share because leaving is too painful.
• Is it a network effect? Platforms like Visa or Facebook become more valuable as more people use them. This creates a winner-take-all dynamic where the leader's SOM is incredibly difficult to challenge.
• Is it a cost advantage? A company like Costco uses its immense size (scale economies) to offer prices that smaller competitors simply cannot match, thereby defending and growing its slice of the retail market.

Calculating SOM is simple in theory. The formula is: Company's Total Sales / Total Market Sales = Share of Market For instance, if a carmaker, “EuroMotors,” had €20 billion in sales last year and the total sales for all cars in its target market were €250 billion, its SOM would be: €20 billion / €250 billion = 0.08, or 8% The challenge for an investor is not the math, but finding reliable data for “Total Market Sales.” This information can often be found in industry reports, market research publications (like those from Gartner or Nielsen), and sometimes in a company's own annual reports or investor presentations.

A savvy investor digs deeper than the headline percentage. The context is everything. Ask yourself these questions:

• Is the company's SOM growing, stable, or shrinking over the last 5-10 years?
• Is the company achieving this share profitably, or is it “buying” share by losing money on each sale?
• Is the overall market (the pizza itself) growing or shrinking?
• What is the source of the company's SOM? Is it a fleeting fad or a durable advantage?

The most significant nuance in using SOM is defining the “market.” The result can change dramatically based on how broadly or narrowly you define it.

• Example: What is Coca-Cola's market?

1. If the market is “cola-flavored carbonated drinks,” its SOM is dominant.
2. If the market is “all carbonated soft drinks,” its share is smaller.
3. If the market is “all non-alcoholic ready-to-drink beverages” (including water, juice, and tea), its share is smaller still.

An investor must think critically about which definition—the total addressable market—is most relevant for evaluating the company's future prospects.

Beware of companies that achieve a high SOM through aggressive, unsustainable price-cutting. Gaining a 50% market share while losing money on every product sold is a recipe for disaster, not a sign of a great business. A high SOM is only valuable when it translates into strong and sustainable profits.

A company might boast a 90% market share, which sounds impressive. But if that market is for something obsolete, like DVD players, that dominance is not an indicator of a healthy future. Always assess the health and long-term trajectory of the industry itself before getting too excited about a company's leading position within it.