Market Penetration

Market penetration is a comparison of the actual and perceived usability of a product or service by customers. Sometimes the development of strategies (aimed to increase the market part of a particular product or service) requires this indicator.

Understanding Market Penetration

The size of the potential market can be determined by the market penetration. The larger the total market size, the more new-entrants to the industry are interested in winning market share or getting a percentage of the total number of potential customers in the industry.

Let's look at the example of a cellular connection. The country has a population of 300 million people, 65 million of whom have cell phones. This means that market penetration is about 22%. It turns out that 78% of the population (235 million) is not covered by this service. In other words, these are potential consumers of cellular services, which means growth potential for cellular providers and cellular phone manufacturers.

In the same example of mobile telephony, market penetration is needed to assess the ability of cell phone manufacturers to meet expected sales profits. Market penetration can evaluate the industry as a whole. It can help to determine companies' prospects for gaining market share or income growth through sales. If existing companies have the major part of the market share, it means that there is little perspective for the growth of new companies and sales. Such a market is considered as saturated.

Market Penetration for companies

Companies can use market penetration not only to measure volume and for products and services in an industry, but also to estimate the market share of their product.

In essence, market penetration measures the number of potential customers who bought a particular company's product instead of a competitor's product, or who bought nothing at all. This indicator is expressed as a percentage of the total market volume of a certain product.

Market penetration is the ratio of current sales of a product or service to the total sales of certain products and their analogues, including competitors, multiplied by 100 (to transfer a decimal fraction and get the result in percentages).

The leading companies in the industry have a high rate of market penetration of their products. They often have an advantage because of their brand and well-established products. This allows them to reach more potential customers. For example, leading companies have more shelf space in supermarkets because their products are popular. In addition, their products are better positioned than competing products.

Because of the large volume of sales, the market leaders have another advantage. It is the ability to negotiate more favorable terms with suppliers. Due to this and the large scale of their activities, the manufacturing of products by market leaders is often cheaper than by their competitors.

Increasing Market Penetration

Market penetration measures the level of market share covered and determines the potential for new sales. Market development shows the stages for achieving an increase in market share.

Market development involves increasing the number of potential customers. This requires specific details or steps that make up a strategy. To cover untapped market segments, some strategies include advertising, social media groups and direct sales, or price reductions and product bundles.

For example, in a greater share of the market for women, the product of a well-known company prevails. Then, it is decided to do a market penetration analysis. According to the results, it becomes clear that there is a small share of consumers of this product among men as well. Thus, the company can aim to increase the number of consumers among men. A special product and marketing campaign can be developed for this purpose.

Market penetrations can be recalculated after each sales and marketing move by a company to get an idea of the reaction to their products by their customers and the entire market. This will allow them to understand whether sales and marketing campaigns have been successful or not, and whether market share has increased or decreased. These figures can be compared to the same figures of competitors to get information about the sales of products and services. The company will have an idea if it is successful in the market or not.