What Is Market Penetration? (Plus How To Calculate It)

By Indeed Editorial Team

Published 20 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Market penetration helps businesses identify the total number of people buying a product or a service compared to its total market size. Businesses use it to determine their market share and evaluate the potential for expansion or entry into a market. Learning about market penetration can help you prepare a business plan, expand the market size for products and services, improve overall business profitability and emerge as a market leader. In this article, we define market penetration, discuss why it is important for businesses, explain how to calculate it and explore how companies can improve their market penetration.

What is market penetration?

Knowing the answer to, "What is market penetration?" can help you understand why it is crucial for business success. Market penetration is a metric used to measure the number of people using a product or a service in relation to the total estimated market for the product or the service. This number is usually a percentage of the total estimated market. Market penetration of a product tells a company about the total size of the market and how it is performing as compared to its business competitors.

Market penetration can help a business take strategic decisions on how to improve its market share, revenue and profitability. Assessing the market size and penetration is vital when entering a new market or launching a new product. For example, suppose the total population of a city is two million and 0.4 million of them own a television set. In that case, it indicates that the market penetration for television sets is 20% in that city. This figure tells television manufacturers that 80% of the market does not own a television, and there is scope for expanding into the market.

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Why is market penetration important for businesses?

Market penetration helps businesses obtain a quantitative measure of how their target audience views their product and the popularity of their products. They can calculate their competitor's market share, compare products and understand which company is performing better. Market penetration helps companies identify if there is an opportunity to increase sales or expand their business. If a business has been trying to gain a bigger market share in any market without any substantial results, it can be a sign for them to revisit their marketing strategy and understand the market and their audience better.

The company with the highest market penetration has the largest market share and is the market leader. Market leaders can negotiate favourable rates with vendors due to a high market share, which in turn reduces their cost of production and helps improve their profit and growth. Market leaders also usually have a marketing advantage as their products receive larger shelf space and better positioning than business competitors. This is because market leaders typically have an established brand name and attract customers easily. Market leaders are often trendsetters and have higher brand recall than their competitors.

Related: How To Calculate Growth Rate Using Different Methods

Calculating market penetration

Companies use market penetration to analyse their industry and measure the market share of their products and services. It represents the total sales of a company in relation to the total market for the product. You can use the following formula to calculate market penetration:

Market penetration = (number of customers for a product/ total market size) X 100

For example, say that the market size for washing machines in a country is 50 million and five million people use them. This means the market penetration for washing machines is 10% in that market. If a company has two million customers in that market, it has a penetration of 4% and its competitors 6% of the market share. The remaining 90% of the market has the potential for companies to expand and increase their sales. Businesses aim to occupy a larger market share than their competitors or eliminate competition through mergers or acquisitions.

How to increase market penetration

Different market penetration strategies may work for different types of businesses. Here are some ways in which companies can increase their market penetration:

1. Increase advertising

Businesses can improve brand awareness among targeted customers by increasing marketing and promotional activities. This can help them reach new audiences and also existing customers. Companies can focus on one or more marketing channels as per the campaign objective and budget. Identify the channels that have the highest conversions and where the target audience is most receptive.

A well-planned advertising campaign can help businesses increase their market share exponentially. For example, promotional campaigns during major festivals and holidays can help improve brand awareness and recall value. Some promotional activities, like offering discounts or free samples, can also encourage new buyers to purchase the product and eventually convert them into repeat customers.

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2. Adjust the product pricing

Adjusting the pricing for products and services can help businesses increase their consumption. Analyse how much your competitors charge in the same product category and compare it with your pricing. Ensure that your prices are not significantly higher or lower than your competitor's. This is because customers may consider low-priced products inferior in quality while they may view high-priced products as unattainable.

While entering a new market, most businesses offer a lower price initially and then eventually increase it as the demand for their product grows. This can be an effective market penetration strategy to create a stable customer base. Companies can also offer special discounts to their repeat customers through loyalty programmes. Other pricing tactics to attract new customers and engage existing customers include implementing volume-based pricing, coupon redemption programmes, customer referrals, and product giveaways.

3. Introduce new distribution channels

By introducing new distribution channels, businesses can reach more customers. Companies can identify the value and reach of different channels to determine where to invest. For example, a business targeting young professionals can use social media marketing to engage with potential customers. They can extend the social media strategy and introduce an online store or start selling their products on their social media channels to become more accessible. This can help them engage customers who shop online and spend time on social media platforms.

4. Diversify existing products and services

Businesses can use product diversification strategies to increase their market share, improve profitability and achieve higher sales. These offerings can be in the same category or be unrelated to existing products and services. For example, a bakery can expand its products to include fresh produce from local farmers and suppliers. Similarly, it can also consider offering the services of a florist to provide greater value to customers looking to organise events.

Such strategies can help businesses target those customers who already use their products and attract new customers who may be interested in the latest versions of existing products. This can also make the business more competitive.

5. Improve your current products and services

Improving the quality or features of current products and services can often help businesses draw more customers. This may not require significant changes to the products or only minor improvements to existing specifications. Companies can also change the product packaging and include announcements of the new version in advertising campaigns.

A great way to undertake this product improvement exercise is to conduct a survey from customers and seek their feedback about the quality, price, after-sale service and benefits of the product. This can also help improve customer engagement and redress grievances.

Related: Customer Satisfaction: How To Measure And Tips For Improvement

6. Form strategic collaborations

Companies can enter into strategic alliances with existing businesses and service providers to expand their market share or launch new products. These alliances can be in the form of partnerships, joint ventures or acquisitions. Such alliances can help businesses combine their market shares and resources, improve existing processes and access each other's markets. Due diligence, analysis and research are essential before entering into such collaborations to ensure maximum utilisation of resources and investment.

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7. Improve your sales strategy

Changing the sales strategy can also help businesses improve their market share. Consider different sales and lead generation strategies, such as email marketing, paid ads, press releases and cold-calling campaigns. Redesign the various stages of the sales funnel and ensure that existing sources of customer data are reliable and accurate. After changing the sales strategy, it is vital to track the results to understand if the conversion rates are increasing. By tracking results, businesses can also identify the channels that contribute significantly to the growth and focus on them exclusively.

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