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Market Penetration

A quantitative measure of the usage of a product by a customer

What is Market Penetration?

Market penetration refers to a quantitative measure of the usage of a product by a customer. It is compared to the total estimated market for a particular product or service and expressed as a ratio. It is then used for the development of strategies required to increase the total armlet share of a product or service.

 

Market Penetration

 

Calculating market penetration enables 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 can 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.

 

Summary

  • Market penetration refers to a quantitative measure of the usage of a product by a customer.
  • It can be mathematically expressed either as a percentage or a ratio, representing the percentage of the total market available to a company.
  • The process of widening a company’s reach in order to realize the gains that are accessible to it 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 little to there are none at all. 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.

When expressed as a metric, it accounts for the total number of users that either already purchased the product of a specific company as opposed to the product offered by the competitor or purchased no product at all.

It can be mathematically expressed either as a percentage or as a ratio, representing the percentage of the total market available to a company.

 

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.

 

Market Penetration

 

Advantages of High Market Penetration

When a company enjoys a high degree of market penetration for their 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 Certified 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:

  • Market Dynamics
  • Supply and Demand
  • Serviceable Obtainable Market (SOM)
  • Total Addressable Market (TAM)

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