Penetration Rate
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Penetration Rate
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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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A marketing plan is an operational document that shows how an organization is planning to use advertising and outreach to target a specific market.
A backorder is an order for a good or service that cannot be filled immediately due to a lack of available supply.
Marketing refers to the activities of a company associated with buying, advertising, distributing, or selling a product or service.
A product line in business is a group of related products under the same brand name manufactured by a company. Read how product lines help a business grow.
The 4 Ps are the key factors in marketing a product or service: product, price, place, and promotion.
The brand potential index (BPI) estimates the size of a potential market that a brand may be able to reach.
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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.
M a r k e t P e n e t r a t i o n = S a l e s V o l u m e T o t a l S a l e s v o l u m e o f a l l s i m i l a r p r o d u c t s × 1 0 0 [ 1 ] \textrm{Market Penetration} = \frac{\textrm{Sales Volume}}{\textrm{Total Sales volume of all similar products}} \times 100 {}^{[1]} Market Penetration = Total Sales volume of all similar products Sales Volume × 100 [ 1 ]
P e n e t r a t i o n R a t e = N u m b e r o f C u s t o m e r s T a r g e t M a r k e t S i z e × 1 0 0 [ 3 ]
\textrm{Penetration Rate}= \frac{\textrm{Number of Customers}}{\textrm{Target Market Size}} \times 100 {}^{[3]} Penetration Rate = Target Market Size Number of Customers × 100 [ 3 ]
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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 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. [1]
For consumer products, market penetration should be 2-6%. For Business products, it should be 10-40%. [2]
[1] Retrieved May 21, 2021, from https://www.investopedia.com/terms/m/market-penetration.asp
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A quantitative measure of the sales of a product or service compared to the total estimated market
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.
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 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).
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.
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.
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.
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