What is market penetration?
Market penetration is the measure of how much market share a business has in its industry. It's typically calculated by taking the total sales of a product or service within a specific market, and dividing it by the total market sale potential for the same products and services.
It can be used by businesses to track growth, evaluate its performance against competitors and identify new market opportunities. Since it's a good way to measure overall performance in an industry, market penetration can be a significant indicator of successful marketing efforts. Knowing your brand's rate can guide your marketing strategies when it comes to expansion, product improvement and pricing changes.
Market penetration examples
Here are two scenarios that prove the stronger your brand's market penetration, the easier it is to extend it. As you read through these for inspiration, keep in mind that each business's strategy is product, industry and customer specific:
1. A soft drink company has been selling products in a specific region for several years, and by now it has established a strong customer base. Wanting to increase their market penetration, the company decided to launch a new product and advertising campaign aimed at attracting new customers, alongside offering discounts to existing customers. This is an example of how a business can use their strong market penetration to gain new clients before competitors and deepen their influence even further.
2. A technology company marketing their products to businesses decides to target individual consumers as well. By measuring their market penetration, they realize this can be achieved with the creation of more affordable products, expanding its retail network and developing targeted marketing campaigns.
How to measure market penetration
There are several ways to measure market penetration. Some of the main methods include:
1. Measuring market share
This is the percentage of the total market that a business has captured with its product or service. It’s calculated by dividing the business's total sales in a market, by the total sales in the market. If a company achieves $100 million of sales in a market that has $1 billion in total sales, their market share is calculated as 10%.
2. Counting customers
Market penetration can be measured by calculating how many customers a company has within a specific market. A business with 10,000 customers, out of a total market share of 100,000 potential customers, would have 10% market penetration.
3. Distribution channels
Another way to measure market penetration is through the number of retail outlets or distribution channels where a company’s products are sold. If a business has products available in 100 retail stores within a market of 1,000 stores, that would mean 10% market penetration.
4. Customer segmentation
By looking at specific customer segments, such as age, gender, income and location, companies can measure their own market penetration against each of these. Let’s say a company records 10% market penetration among customers aged 18-24, but only 5% market penetration amongst those aged 25-34, they will need to adjust their product and marketing efforts in order to increase their reach in older age groups.
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Market penetration formula
The market penetration formula is as follows:
Market Penetration = (Company's Sales / Total Market Sales) * 100
In this formula, "Company's Sales" refers to the total sales generated by the company within their specific market and "Total Market Sales" refers to the total sales of products or services in that market. Dividing the company's sales by the total market sales, market penetration is expressed as a percentage that indicates the business's share of the market.
For example, if a company has $10 million in sales in a market with $100 million in total sales, the market penetration can be calculated as follows:
Market Penetration = ($10 million / $100 million) * 100 = 10%
This means that the company has a 10% share, meaning it sells 10% of all the products or services in that market.
How to increase market penetration
There are many ways to improve your business's market penetration. Some of the main tactics include:
Product innovation and releasing new product features
Price adjustments, including special offers or discounts
Marketing and advertising campaigns to reach new audiences
Improving distribution and channel management
Market penetration strategies should focus on increasing a company’s market share by selling more to current customers or gaining new customers within the same market. To start, it's recommended to conduct market research. This will help you understand your target audience better, shed light on the competition and help choose the best strategy for reaching specific customer segments and markets.
When deciding how to improve market penetration for a business it’s important not to confuse this process with market development, which involves expansion into new markets, or with product development, which involves launching of new products or services.
What is a good rate of market penetration?
When understanding what a healthy rate is for your business, it’s important to think about the industry, specific market and goals of the company. These factors can impact the potential rate of market penetration and how each business goes about assessing and improving their own.
In some industries a rate between 10-20% may be considered good, but in others business will aim for a rate of 50% or more. Companies targeting a niche market, for example, may be satisfied with a lower rate if they’re still generating long term profit.
Of course, the higher the rate the better. But what's most important is for businesses to understand how market penetration rates compare on an industry and market level, and against their competitors. This will help them to focus on assessing and improving their own.
Tips for improving market penetration
The following are some ways in which businesses can focus on improving their market penetration rates:
1. Focus on existing customers
This is perhaps one of the most effective ways to improve market penetration. Combine market research and customer feedback to really understand the needs of existing customers and establish a solid market share.
2. Build brand and company visibility
Develop marketing and advertising strategies to build on your brand awareness and attract more customers. Social media marketing, online and digital marketing, and content marketing are all great ways to achieve this.
3. Analyze at the current market
By analyzing current market conditions, which will change over time, businesses can identify new opportunities for growth. For example, this might mean finding the potential to target new customer segments within a current customer base.
4. Improve pricing strategy
Your prices should always reflect the value of the product or service within the current market conditions. One way to improve market penetration is by pricing more competitive and appealing amounts, or offering discounts for existing customers.
5. Measure progress
Stay on top of market penetration metrics, such as market share. This is essential for measuring your current marketing strategies and for understanding how to adjust them when needed.