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Potential market share in new entry

Mo asked on Feb 05, 2017 - 1 answer

If there's a case in which client enter a new market, how do you answer the question: What is the expected market share after entry? If it's a concentrated market, I am assuming the market share figure will be low, vs. a fragmented one. But how do you put a number to the exact market share? 5%, 10%.. ?

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Hemant
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replied on Feb 05, 2017
Current partner @ Andreessen Horowitz (VC firm). Ex-Mckinsey, ex- strategy guy at Google.
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It's a badly framed question but that is no reason you should have a badly thought-out response. Sometimes interviewers will ask these just to tell whether you jump into a "5%? 10%?" guess-work or use this as an opportunity to really lay out how analytical your mind is. Before you even answer a "market share" question you have to understand what does market share depend on: what are the drivers? There are two types of primary market types:

1. commodity: good/services that are offered by many and to many (e.g. potatoes are sold by many and bought by many) and the main drivers of market share are essentially a matter of (a) supply side deficiency (how many more people need potatoes that aren't supplied yet) and (b) price elasticity of demand (how many will move to a cheaper potato if offered).

2. non-commodity: good/services that are offered by few to many or few (e.g. snapchat -- few to many or tesla -- few to few), and have a high switching costs. The main drivers of market share are: (a) product and service differentiation and (b) pending or latent demand.

To get to a market share, you need to first figure out which market you are playing in. Say it's commodity (e.g. you are selling potatoes). Then:

Total market you can capture = DEMAND GAP [ (360M people (assume 100% of people eat potatoes) x potatoes eaten /day x days/yr) MINUS total potatoes supplied today ] MULTIPLIED by % of how much of that demand you can meet PLUS % that will switch to yours if you price lower than market.

From the above you can figure out the % of total market you can capture.

Hey Hemant, in considering the Non-Commodity market, would you still consider a Demand Gap analysis? In this case, I assume it's not a Demand Gap issue but a Supply Gap issue. Still, it seems the considerations are the same. Can you elaborate a bit? Thanks! Thea — Theodora on May 25, 2017 (edited)

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