Market penetration is a ratio that indicates how successful a product or a service is in the market compared to its total estimated market. It’s used by companies to increase the market share of products and services.
We use the term to outline two processes. One defines the strategy a new business implements to enter the market, and the other is for calculating the percentage of a market share a company’s product can capture. In this article, we’ll learn how to estimate the rate, make the difference between market penetration and market development clear, explore six effective strategies, and review an example.
How to Calculate the Market Penetration Rate?
Market penetration is an important measurement for new companies that plan to enter the market. Calculating the percentage allows them to evaluate the industry and their potential in it, estimate their possible market share, and revenue. Business owners can also leverage the formula to find out how actively customers buy products or services compared to its total estimated market.
To calculate the rate, you need to know the number of your clients and the size of your target market. Below you can see a formula to easily estimate the percentage for your firm.
Once you obtain your penetration rate, don’t forget to constantly monitor it to see some changes. As an option, consider estimating it after you run a sales or marketing campaign. The increase or decrease will show you how successful the campaign is.
To avoid any confusion that may arise when you hear about market penetration and market development, let’s discuss these two terms in more detail.
Market Penetration vs Market Development
Market penetration is a strategy that implies using a product or service in the existing market to build a bigger customer base, increase market share, and be perceived as a leader. To reach this objective, companies reduce prices, put more effort into promotion, or increase sales volume. To have a wider reach, brands also consider creating more convenient locations for their target market.
Market development involves creating a new product or service to satisfy the existing market. The strategy entails research and development stages and is used by companies that have profound knowledge about the market. These firms are ready to bring new solutions to the emerging customers’ problems.
Let’s take the automobile industry, for example. As our world changes and becomes more environmentally friendly, the needs of people change too. Conscious drivers want to have cars that don’t harm our environment. As a result, brands launch the production and introduce electric cars to their target audience.
The difference is clear, so the next step is to explore the list of the most successful penetration strategies.
6 Market Penetration Strategies
Many businesses try to increase their penetration rates to become leaders in their industries, have access to a bigger audience, and increase their market share. For this purpose, they leverage different strategies. So, let’s find out the best of them.
- Consider educating your audience. If you are just entering the market, the first thing you should do is to educate people about your product or service. Draw attention from well-established companies to your brand by using various marketing tools like paid ads on social media channels, pay-per-click ads, and optimizing your website. For example, Cabot Creamery, a brand that produced cheddar cheese and dairy products, leveraged social media and Pinterest to educate people about its products.
- Use more distribution channels. Companies that strive for growth should also use different distribution channels. Don’t focus solely on traditional outlets, now, when digital channels prosper. Direct and indirect channels, dual distribution, and the internet are the strategies you can implement to sell your products.
- Implement innovation. If your goal is to improve the market share, think of the ways to achieve this objective. Improve the product customers like. Knowing the pros and cons of your product means that you have a huge advantage over competitors. Use these insights, make the product better and more salable by implementing possible technology perks and new accessories.
- Reach new geographics. Many companies consider expanding their offers to other locales. It helps scale, access new markets, and reach more potential customers. Yet, like any business, it also carries financial risks. That’s why, before you dare to take this bold step, make sure that you have an amazing value proposition and a strategy to fight with your competitors.
- Target certain locations. There are seasonal products and products popular in certain locations. So, you need to do research to find out where there is the greatest demand for your product or service. Let’s take a producer of a sunblock, for example, and compare the demand for its product in Los Angeles and Seattle. For sure, the demand would be higher in sunny Los Angeles.
- Simplify purchasing process. First of all, you need to ensure that the online shopping system on your website is perfect. Brands with a simple purchase process have more clients who reach a checkout. It’s obvious that buyers don’t want to waste their time and energy on filling out long forms and specifying a lot of information. They will rather search for another company where the process is easier and shorter. Moreover, you should allow customers to choose among different payment systems.
Now when you are acquainted with the most popular strategies, let’s proceed to the example.
Example of Market Penetration
Let’s imagine that there is a country with a population of 250 million people. If, for example, 50 million of this country have laptops, market penetration would be 20%. It means that there are still 200 million people (they make up 80% of the population) who don’t have laptops, so they are potential buyers for companies that sell personal portable computers. They remain untapped. Penetration rate shows businesses the potential for their growth.
To put it simply, our example indicates that laptop manufacturers have a great environment for growth since there are still a lot of people who don’t have their products yet. By calculating the rate, firms have the chance to evaluate the industry and estimate whether they will be able to meet their market share and revenue expectations.
To conclude, the measure we discuss is essential both for startups and well-established companies. It helps assess and analyze the market and find out whether it will contribute to the achievement of goals.
- This article covers the term, reveals the ways to increase market penetration rate, and provides an example.
- This article provides information on how to create a market penetration strategy and reviews the most common strategies.
- In this article, the author uncovers the difference between market penetration and market development.
Last Updated: 27.08.2021