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Market share vs profit share

Anonymous A asked on Aug 23, 2018 - 1 answer

Hey there,

I stumbled upon a case about baby helmets (L.E.K) that states that two dominant players have together 60% market share. Later, we need to calculate the total market profit and then have to figure out the market share that we need to achieve given our profit goal. They calculate it simply by dividing our profit goal by the total market profit.
Hence, the implicit assumption is that prices and costs per unit are the same for every player in the market? Otherwise we couldn't calculate this using the profits as market share is based on revenue and not profit right?

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Sidi
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updated his answer on Aug 23, 2018
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 100+ candidates secure MBB offers
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Short answer: yes this is correct! You have to assume identical prices and costs.

If prices and costs differ, then you need to solve a slightly more complex problem:

1. Firstly you need to identify the volume which you need to sell to reach your target profit (using the usual equation: profit = (price*volume) - (marginal cost * volume) - fixed cost and solving for volume)

2. Secondly you convert the target volume to target revenue (easy, since the price is given)

3. Thirdly you now divide this target revenue by the market size to get your required market share

Cheers, Sidi

(edited)

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