What It Is and Strategies to Increase It

What Is Market Penetration?

Market penetration is a measure of how much a product or service is being used by customers compared to the total estimated market for that product or service. Market penetration can also be used in developing strategies employed to increase the market share of a particular product or service.

Understanding Market Penetration

Market penetration can be used to determine the size of the potential market. If the total market is large, new entrants to the industry might be encouraged that they can gain market share or a percentage of the total number of potential customers in the industry.

For example, if there are 300 million people in a country and 65 million of them own cell phones, the market penetration of cell phones would be approximately 22%. In theory, there are still 235 million more potential customers for cell phones, or 78% of the population remains untapped. The penetration numbers might indicate the potential for growth for cell phone makers.

In other words, market penetration can be used to assess an industry as a whole to determine the potential for companies within the industry to gain market share or grow their revenue through sales. Revisiting our example, the global cell phone market penetration is often used to estimate whether cell phone producers can meet their earnings and revenue estimates. If the market is considered saturated, it means that existing companies have the vast majority of the market share—leaving little room for new sales growth.

Market Penetration Rate

A key component of market penetration is quantifying a company’s market penetration. This is done by calculating a firm’s market penetration rate (discussed below). A market penetration rate is simply a ratio that compares a company’s performance against the total market.

The market penetration rate is especially important because it allows companies to compare where they are currently, where they have been, where they want to be, and how their competitors are performing. The market penetration rate allows a company to set a SMART goal that can be calculated and tracked over time.

How to Calculate Market Penetration

Market penetration can be quantified as a rate that describes what proportion of the market has been saturated by the company. To calculate market penetration, you must know the number of customers a company has secured in addition to the total market size.

Market Penetration Rate = (Number of Customers / Total Target Market Size) * 100

The number of customers will be each unique customer that the company has secured business with. Some may choose to only use repeat customers to analyze the stronger consumer base. Others may choose any customer that has transacted in a given time period (i.e. over the past five years).

The total market size may be difficult to define, especially if the company has a broad geographical area or sells goods online. The total market size is not necessarily the population of the area; instead, it is the total potential customers the company could have.

An alternative but similar way to calculate market penetration is to focus on dollars as opposed to people. Sometimes, industries may be quoted as having a certain value or sales potential; therefore, companies can compare what they’ve sold and compare it to this market potential.

Market Penetration Rate = (Total Sales Dollars / Total Target Market Sales Potential) * 100

In this latter formula, a company may care less on the number of customers it has secured. This strategy may be important for companies that are striving to secure the largest customers or biggest market participants. Though they may receive a small market penetration rate when considering the number of people they serve, companies that transact with the largest customers may be in better shape when using the second formula.

Market Penetration for Companies

Market penetration is not only used on a global and industry-wide scale to measure the scope and for products and services, but also is used by companies to assess their product’s market share.

As a metric, market penetration relates to the number of potential customers that have purchased a specific company’s product instead of a competitor’s product, or no product at all. Market penetration for companies is typically expressed as a percentage, meaning the company’s product represents a certain percentage of the total market for those products.

To calculate market penetration, the current sales volume for the product or service is divided by the total sales volume of all similar products, including those sold by competitors. The result is multiplied by 100 to move the decimal and create a percentage.

If a company has a high market penetration for their the products, they’re considered a market leader in that industry. Market leaders have a marketing advantage because they can reach more potential customers due to their well-established products and brand. For example, a market leader and manufacturer of cereal will have far more shelf space and better positioning than competitor brands because their products are so popular.

Also, market leaders can negotiate better terms with their suppliers because of their significant sales volume. As a result, market leaders can often produce a product cheaper than their competitors, given the scale of their operation.

Market Penetration Strategies

When a company tries to implement growth strategies, there are often four ways of doing so: developing new markets, diversifying into new products, penetrating existing markets, or developing new products. These four strategies are often depicted in an Ansoff Matrix.

Because the strategies that require new markets or new products are considered riskier, market penetration is often the lower risk option for growth. This is because the market has already been created and can be studied. In addition, the company may already be offering a product or a variation of the product. Using some of the techniques below, a company may experience growth through market penetration.

Change Product Pricing

More likely than not, a company won’t be able to increase market share by increasing its price, Though Veblen goods do contradict the law of supply and demand, a company can more likely increase market penetration by lower its prices. This requires the company to sufficiently understand its input costs and profit margins. It also requires an understanding of its consumer base and whether a lower price will attract the audience the company intends to have long-term.

Create New Product

Though market penetration often occurs with existing products, a company may be able to solve a customer’s problem in an innovative way with a new good. Though this riskier option does not guarantee market adoption, a company may invest in research and development to study existing products, analyze gaps in value, detect where existing products fall short of consumer expectations, and manufacture a new good.

Target New Geographies

With the proliferation of online sales, many businesses may already have access to wider markets than they realize. However, for service companies may be restricted to one geographic region, the company may employ the market penetration strategy of moving, developing, and expanding to a new area. Without having to leave its original location, the company may be able to fund operations in a new site by leveraging success at an existing site.

Seek Partnerships

Instead of seeking new places to operate, companies may penetrate new markets by seeking new people to work with. Consider the Barnes & Noble and Starbucks partnership. By agreeing to share in the success of internally-operated cafes within bookstores, Starbucks was able to enter into a different market it otherwise would not have had access to.

Innovate Existing Product

Though one strategy above entailed creating a new product, sometimes companies simply need to revamp an existing good. This is clearly evident with the frequent releases of updated smartwatches, cellphones, gaming consoles, or other technological devices. With each iteration, a company can simply improve and offer new benefits. Plus, existing customers that have already experienced the old devices may be further inclined to upgrade after a positive experience.

Acquire Other Companies

Though partnerships entail two separate entities temporarily coming together to share in the success, acquisitions result in two separate entities legally joining together. By acquiring a company, the acquirer may instantly have access to new products, markets, labor skillsets, intangible assets like goodwill, or research & development.

Create Promotional Opportunities

For companies that do not want to permanently discount their prices, companies can penetrate markets by offering temporary promotional opportunities. This strategy lures consumers in by attracting them to low prices. Be advised that though this may result in short-term success, it is more likely to lead to the incorrect audience having been attracted, especially if a company strives to be a higher-quality (and therefore higher price) company.

Invest (More) In Sales Representatives

Companies may have everything they need to successfully bring a product to market. However, if they do not have the appropriate staff on hand, their product may falter. No matter how strong a manufactured product is, a company must be able to bring it to the market, communicate its value, and close sales. This may require a company to increase the headcount of sales reps or invest more heavily in stronger talent.

Advantages and Disadvantages of Market Penetration

Pros of Market Penetration

For most companies, increasing their market penetration will increase sales. That’s because market penetration strategies often entail increasing the number of customers served or more deeply becoming engrained in the larger customers they serve.

Companies may also experience other benefits from market penetration. Market penetration leads to higher visibility of products or services, and markets may begin to better recognize the benefits a company may be able to offer. This allows a company’s brand equity to increase, as public perception of a company is most often improved as the company penetrates new markets.

Companies can also leverage successful market penetration by being more strategic with what they offer customers. Instead of being a price taker, companies that have a deeper presence in a market are more likely to be able to set their own price, sale terms, or enhance their products as they see fit. In many ways, market penetration can only occur through product differentiation and being able to convey unique benefits to consumers.

Cons of Market Penetration

Though market penetration may improve operations, it also has the risk to backfire. When companies seek out new markets or offer new products, it always runs the risk of diminishing their existing image, creating wrong public perceptions about their company, or attracting a client base that does not align with their strategic plan. As products become less popular, companies may be forced to liquidate products by selling them at a discount if they no longer resonate with consumers in markets they penetrated.

Though companies often perform market segmentation to attempt to attract the right customers, market penetration may increase the risk of the wrong customers being served. This can be detrimental to a marketing plan that strives to cater to a certain customer willing to pay certain prices for a certain quality of goods. Should Apple accidentally attract consumers who want to pay the lowest prices in the market, it will face a dilemma in trying to retain those customers or shifting its marketing plan.

Market penetration may also sound like a single instance of garnering deeper market presence, but it is actually a company-wide strategy that requires everyone to be on the same page about. Consider how the manufacturing, warehousing, procurement, or selling departments may not be aligned. This puts undue pressure on some departments that may need to play catch-up as markets are penetrated.

Example of Market Penetration

By the fourth quarter of 2017, Apple Inc. (AAPL) had amassed a market share of more than 50% of the smartphone market throughout the world. Apple has consistently introduced new versions or their iPhones with added enhancements and upgrades, including releasing its high-end iPhone X. As a result of its market penetration, Apple has a larger market share than all of its competitors combined.

However, the company still has opportunities to add to its customer base by targeting its competitors’ clients and woo them over to Apple products and services.

The Bottom Line

Market penetration is a measurement of how much of a product is used compared to a company’s target audience. There’s a number of strategies a company can use to increase its market penetration including change its pricing, marketing, manufacturing, or operating strategies. A company must be mindful to be stay true to its target audience and broadly communicate penetration strategies across the company.