Market Penetration
A quantitative measure of the sales of a product or service compared to the total estimated market
What is Market Penetration?
Market penetration refers to a quantitative measure of the sales of a product or service compared to the total estimated market expressed as a percentage. It is useful in the development of strategies aimed to increase the total share of those products or services.
Calculating market penetration forces managers to ascertain the size of the potential market for their offering. If the total size of the market is large enough, a new entrant may be convinced that it can gain a set percentage of the total number of potential customers in that industry.
Market penetration is also used by established companies to determine the potential to increase their overall revenue by increasing market share.
Summary
- Market penetration refers to a quantitative measure of the sales of a product or service compared to the total estimated market.
- It is expressed as a percentage of the total market available to a company.
- The process of growing a company’s reach into a specific market in order to realize the gains is known as market development.
Example of Market Penetration
Consider a situation where the population of a country is 100 million. Out of the given population, approximately 60 million people own cell phones. Thus, the market penetration for the telecommunication industry will be 60%.
In theory, there is still a segment of the population, about 40%, to be exact, that remains untapped. It means that there is still a potential for the telecom firm to grow in that particular country. Similarly, in a country with about 20% of the population being untapped, the growth opportunity is lower.
In such a situation, the market will be referred to as a saturated market, which means that opportunities for growth are small. Existing companies already hold much of the market share, leaving little room for sales growth.
Market Penetration for Companies
Market penetration is not only applied to an industry or sector. It can also be used by companies to assess the market share of their product.
Also expressed as a percentage, it represents the company’s total sales of that product compared to the total market (company’s and competitor sales).
How is Market Penetration Calculated?
To calculate the market penetration of an offering, the current sales volume of that product is divided by the total sales volume of all the products with similar features or that fulfill the same needs. They include products sold by the company’s competitors as well. The resultant number is multiplied by 100 to achieve a percentage.
Advantages of High Market Penetration
When a company enjoys a high degree of market penetration for its products, it is considered a market leader in that sector. It gives them a unique marketing advantage since they can access a larger pool of potential customers.
A well-established product and a strong brand name promote loyalty and positive word-of-mouth advertising, etc. A market leader can also negotiate better terms from their suppliers because a large sales volume enables them to place bulk orders.
Similarly, they can employ cost efficiency, given the huge scale of their operation. Even in retail, a market leader can have better shelf space and positioning as opposed to competing brands since their products are far more popular among the target audience.
How can Companies Increase Market Penetration?
The process of widening a firm’s reach to realize gains that are accessible to a company with a large market share is known as market development. It includes strategies related to advertising, direct sales outreach, social media campaigns, lowering prices, bundling product offerings, etc.
Learn More
CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
Financial Analyst Certification
Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!
