What Is Market Penetration? – Importance, Formula, & Examples

Any business starts with a goal to maximise its sales and establish itself as a market leader in the industry. They build the best product, hire the best team and put in the best efforts to make a noise. Many try to launch different products and explore new markets to achieve their objective, but it doesn’t always work.

Sometimes, growth can also be achieved using existing products and resources when the firm does not have a fully developed product idea or the market isn’t fully saturated. This strategy is known as market penetration, and it is prevalent among marketers as it turns out to be the least risky of all.

What Is Market Penetration?

Market penetration is a measurement of how many customers buy a particular product or service as compared to the total estimated market. This indicates the success of the offering in the market against its competitors.

It is generally expressed as a percentage and can be calculated by a simple formula.

Market penetration = current sales value of an offering / total sales volume

market penetration formula

                

Market Penetration Vs Market Share

With having a massive customer base, Apple’s presence is quite evident in the smartphone market all over the world. The company has managed to capture the market to such an extent that 47% of the smartphone users in the US use an iPhone.

The question is here whether this indicates a good market penetration rate or a big market share?

Is there a difference between the two?

If 1000 customers in the market are willing to buy smartphones and Apple manages to sell iPhones to 300 of them. It would indicate that it has a penetration of 30%. It’s generally relative to the target market of the offering.

On the other hand, if the net revenue generated from the smartphone industry is one million dollars and Apple’s revenue adds up to $400,000, it indicates a market share of 40% in the smartphone market.

Why Is Market Penetration Important?

Market penetration is the way of maximising sales through existing products without having to change them. As the market is known territory for the firm, it involves minimal risk and is very popularly used among marketers.

But how would market penetration help in brand building?

  • Easy diffusion in the market: A market penetration strategy helps to infiltrate the total addressable market (TAM), making it easier to reach larger masses. People start noticing the brand and they can make a shift to a new product quickly.
  • Creation of goodwill: Good quality attracts customers and when the brand delivers that to their customers, they are willing to come back. Word spreads quickly in the market and it builds goodwill and a positive image against the competitors.
  • Fast growth: Market penetration is the quickest way to amplify the customer base and establish one’s presence in the market. Setting low prices acts as a driving force to attract customers, which creates a large impact in the market, especially affecting the competition.
  • Economical: Many firms also benefit from achieving economies of scale. Rooting in large product demands causes them to scale their production levels and bring down the cost per unit.
  • Future prospects: Market penetration provides an insight as to how the customers view the offerings. If a firm manages to engage and retain its customers, they also have a cue to sell them any new products it may launch in the future.

How To Calculate Market Penetration?

Market penetration plays a considerable role in building a brand and its

Say, for example, a company sells watches and the total market consists of 5000 customers. Out of these 5000 customers, 500 of them buy its products.

Now to calculate the penetration of this company in the market, we divide 500 by 5000, which gives us a market penetration rate of 10%.

500/5000*100 = 10%

What Is A Good Market Penetration Rate?

It goes without saying that if a company has a high market penetration rate for its offerings, then it will be viewed as a leader in the industry.

But how does one know if the market penetration rate they have achieved is good or not?

It is estimated that a market rate penetration rate of 2-6% is normal or above average for a company. So if a firm’s market penetration rate comes out to be above 6%, they are already doing very well at their position.

However, in a B2B business, the penetration rate can go as high as 40%, which is excellent in any market.

Some companies like to calculate their market penetration rates evenly after each quarter. Some prefer to do it after a promotional ad or campaign to consider the after-effects.

Examples Of Market Penetration

Market penetration is one of the most popularly used strategies in any market today. Large and small companies consider it to be a quick and effective way to create an impact in the market.

  • For example, the smartphone industry – following the consistent introduction of the new iPhone series, Apple has managed to increase its penetration and become a global leader with a rate of 19.2%.
  • Starbucks, the largest coffeehouse company, uses a generic marketing strategy that highlights its products’ uniqueness and quality. As of 2020, it maintains the highest share of the coffee shop market in the US with a rate of 40%.
  • Amazon is the biggest e-commerce website in the world. Each year more than 197 million people get on the website to surf through products. Its market share in e-commerce adds up to more than 50% as of 2021.
  • Netflix is a market leader when it comes to online streaming platforms, constituting 51% of streaming subscriptions in the US. Even though the prices are not as low as other OTT platforms, Netflix manages to be a leader of them all.

Bottom line?

Market penetration is quite an effective strategy for achieving growth without risking much. It works in almost every industry regardless of the size or nature of the business.

But every strategy doesn’t fit in every situation. The marketers need to analyse the competitive space first and then take a decision taking into account their position and any other factors affecting their business.

Go On, Tell Us What You Think!

Did we miss something? Come on! Tell us what you think about our article on market penetration in the comments section.

Leave a comment

What Is Market Penetration? - Importance, Formula, & Examples

by Khushi Agrawal