Market Penetration Definition
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Market Penetration Definition
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Market penetration is a measure of how much a product or service is being used by customers compared to the total estimated market for that product or service. Market penetration also relates to the number of potential customers that have purchased a specific company’s product instead of a competitor’s product. Market development is the strategy or action steps needed to increase market share or penetration.
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The brand potential index (BPI) estimates the size of a potential market that a brand may be able to reach.
The advertising appropriation or advertising budget is the portion of the total marketing budget a company spends on advertising over a specific time.
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Market penetration is a measure of how much a product or service is being used by customers compared to the total estimated market for that product or service. Market penetration can also be used in developing strategies employed to increase the market share of a particular product or service.
Market penetration can be used to determine the size of the potential market. If the total market is large, new entrants to the industry might be encouraged that they can gain market share or a percentage of the total number of potential customers in the industry.
For example, if there are 300 million people in a country and 65 million of them own cell phones, the market penetration of cell phones would be approximately 22%. In theory, there are still 235 million more potential customers for cell phones, or 78% of the population remains untapped. The penetration numbers might indicate the potential for growth for cell phone makers.
In other words, market penetration can be used to assess an industry as a whole to determine the potential for companies within the industry to gain market share or grow their revenue through sales. Revisiting our example, the global cell phone market penetration is often used to estimate whether cell phone producers can meet their earnings and revenue estimates. If the market is considered saturated, it means that existing companies have the vast majority of the market share—leaving little room for new sales growth.
Market penetration is not only used on a global and industry-wide scale to measure the scope and for products and services, but also is used by companies to assess their product's market share.
As a metric, market penetration relates to the number of potential customers that have purchased a specific company’s product instead of a competitor’s product, or no product at all. Market penetration for companies is typically expressed as a percentage, meaning the company's product represents a certain percentage of the total market for those products.
To calculate market penetration, the current sales volume for the product or service is divided by the total sales volume of all similar products, including those sold by competitors. The result is multiplied by 100 to move the decimal and create a percentage.
If a company has a high market penetration for their the products, they're considered a market leader in that industry. Market leaders have a marketing advantage because they can reach more potential customers due to their well-established products and brand . For example, a market leader and manufacturer of cereal will have far more shelf space and better positioning than competitor brands because their products are so popular.
Also, market leaders can negotiate better terms with their suppliers because of their significant sales volume. As a result, market leaders can often produce a product cheaper than their competitors, given the scale of their operation.
While market penetration is a metric to determine the level of market share gained and the potential for new sales, market development focuses on the steps to achieving the gains in market share.
Market development is often a strategy of specific details or action steps needed to increase the number of potential customers. Some strategies employ advertising, social media campaigns, and direct sales outreach efforts to prospects of untapped market segments. Lowering prices and bundling product offerings can also help gain traction in previously untapped portions of the market.
For example, an established company might have a product that has a large percentage of the market share for women. However, the company, following its market penetration analysis, realizes they have a small market share with male customers. As a result, they might develop a specific product and marketing outreach campaign designed to increase their male clients.
Market penetration, as a measurement, can be recalculated following the various sales and marketing campaigns to determine their level of success—whether market share increased or decreased. Market penetration provides companies with enormous insight as to how their customers and the total market view their products. The figures can, in turn, be compared to specific competitors to determine how the company is faring in its sales efforts and how its products and services stack up to the competition.
By the fourth quarter of 2017, Apple Inc. ( AAPL ) had amassed a market share of more than 50% of the smartphone market throughout the world. 1 Apple has consistently introduced new versions or their iPhones with added enhancements and upgrades, including releasing its high-end iPhone X. As a result of its market penetration, Apple has a larger market share than all of its competitors combined.
However, the company still has opportunities to add to its customer base by targeting its competitors' clients and woo them over to Apple products and services.
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If your SaaS startup is looking for low-risk business growth strategies, creating a market penetration strategy should be one of the first things you think about. Although, before moving forward, it’s important to identify a clear definition of market penetration as it relates to SaaS and gain a better understanding of what market penetration strategy is by taking an in-depth look at some common examples.
Depending on where you look, the market penetration definition could be misleading, as there are two different meanings. As shown below, market penetration can be defined as either a measurement or an activity. In this article, we will review both market penetration definitions and how they relate to SaaS.
Market penetration defined as a measurement is the assessment of how much a product is being sold relative to the total estimated market for that product, expressed as a percentage. This is also known as market penetration rate.
If you know your total addressable market (TAM), you can calculate market penetration rate with this formula:
Establishing market size can be tricky depending on the nature of your SaaS product, as a potential customer base could be global and essentially target “everyone.” The more granular you can get with your ideal audience demographics, the easier it will be to make this calculation.
It’s suggested that average market penetration for a consumer product is 2 to 6%, while business products can range anywhere from 10 to 40%. If you can refine your SaaS product to capture 10% of the TAM in any industry – you’ll probably be doing quite well!
Take the smartphone industry for example – global leaders Apple have a market penetration rate of 19.2%, with Samsung coming in second at 18.4%, Huawei at 10.2%, and a range of smaller brands taking the remainder of the market share to its 100% completion.
The smaller smartphone companies such as Oppo and Xiaomi who are coming in around 7% have plenty of opportunity to increase their market penetration by improving their strategy around pricing, product improvement, consistency, and marketing in order to take more of the market share away from Apple and Samsung.
Market penetration defined as an activity (see the Ansoff Matrix below) is the process of going to market with a product in an existing market in which current or similar products already live, and taking market share from the other competing companies. This is also known as market penetration strategy.
The term market penetration (defined as an activity) stems from the Ansoff Matrix, developed in 1957 by Igor Ansoff, which helps companies plan their strategies for future growth. The Ansoff Matrix is a 2X2 matrix representing four different business growth strategies in which a company either enters a new or existing market, and with either new or existing products.
Market penetration strategy is one of the four business growth strategies identified in the Ansoff Matrix, the other three being market development strategy , product development strategy, and diversification strategy . Market penetration strategy refers to when the company attempts to grow using existing products in existing markets, as shown in the bottom left quadrant of the matrix graphic above.
A market penetration strategy carries a low amount of risk, and is an ideal business growth strategy for SaaS startups that are bootstrapped or unwilling to invest heavily in more risky growth strategies.
Put simply, it’s a means of planning how to grow in an already thriving market where similar products exist, and gaining market share by taking your competitors’ subscribers.
Positioning yourself in an established market is a safe bet, because it means there is a need for products in this area. However, it requires strong implementation and execution of strategies around your product positioning , pricing, user experience, and marketing in order to compete and grow alongside existing companies.
When you’re thinking about creating your market penetration strategy and increasing your market share, you’ll need to consider the different ways you can grow your company using your existing SaaS offering to make it more appealing to the customers who exist in your target market.
This can be accomplished with the following tactics:
Price adjustments and refinements tend to be the focus of market penetration strategies for SaaS companies.
As the SaaS industry grows, it becomes harder for new companies entering the market to gain market share. The market penetration rates for software products in the collaboration and CRM spaces especially (e.g. Basecamp and HubSpot) are already quite high due to the large number of SaaS products in that space.
Pricing is one of the main tactics that emerging SaaS products use to gain market share and grow their revenue when using market penetration strategy. These adjustments can be easily measured to determine their level of success.
Did market share increase or decrease when pricing went from monthly to annual? How many new customers were acquired with the announcement of a new pricing plan? Would dropping your subscription prices work to take customers away from your competitors?
Price drops works well in competitive niches where consumers are typically buying based on the cost of a product. By looking at your competitors and comparing your product and services, it can be a strategic move to adjust your pricing in order to achieve greater market penetration.
If your startup is attempting to grow through market penetration strategy, changing tactics or becoming more aggressive with your marketing campaigns can help to increase your awareness in the market. This, in turn, can woo more of your competitors’ customers into switching and signing up for your product instead.
Marketing can also help persuade your existing customers to stick with you instead of leaving for the competition. Loyalty schemes, power user features, strategic alliances , and finding unique ways to deliver value to your users can all help you keep your customers. If your users have a stellar experience with your product, they’ll be more likely to help you out with word of mouth marketing which can also drive an increase in your market share.
If you can’t beat ‘em, join ‘em. Or rather, buy them out. Acquisition as a market penetration strategy is almost as old as business itself. Buying a company in your industry means you’re essentially buying the customer base and the market share that it brings with it – or alternatively, you can buy the competition and then shut them down altogether.
If you’ve got the motivation and the budget, acquisition can be an effective tactic. If you’re in startup mode, acquisition is probably not in your ballpark just yet. In this case, you could look into strategic alliances with similar companies in order to capture their audience and widen your market by doing so.
Listening to your customers, and keeping track of what competitors’ customers are saying about their products can help you pinpoint essential features and functions that people are looking for.
A slight adjustment to your product could make all the difference in terms of your market penetration rate by giving your market something that they need and can’t find with any other company.
Acquisition is huge in the SaaS world, with industry giants regularly snapping up smaller companies in order to expand their services and capture more of the market share. Here’s a list of the top 10 company acquisitions that happened over the last year.
Diet Coke was a huge hit when it was released, but it attracted primarily female consumers. Men were avoiding it because it felt like more of a feminine drink.
Coca-Cola’s solution? “Bloke Coke”, or rather Coke Zero, which is essentially the same in terms of taste and benefits but squarely positioned and marketed to capture the male market share they were missing with Diet Coke.
Android is well known for its penetration pricing strategy . By offering its phones at a low entry price, it can aggressively lure consumers from Apple who have the main market share in the smartphone market.
Market penetration strategy involves focusing on selling more of your SaaS product into your existing market in order to acquire a higher market share and gain more of your competitors’ customers.
With strategic planning around pricing, competitors, increasing your promotional efforts, and making any necessary changes to your product, it should be possible to increase your market share and slowly gain dominance in your market.
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(number of customers ÷ target market size)
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