Market penetration is a ratio that indicates how successful a product or a service is in the market compared to its total estimated market. Companies use it to increase the market share of their 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 market penetration rate
Market penetration is an essential measurement for new companies that plan to enter the market. Calculating this ratio allows them to evaluate the industry and their potential in it and estimate their possible market share and revenue. Business owners can also leverage the formula to determine how actively customers buy their products or services compared to their 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 the formula to easily estimate the ratio 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 your 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 larger customer base, increase market share, and be perceived as a leader. Companies can reduce prices, put more effort into promotion, and increase sales volume to reach this objective. Brands also consider creating more convenient locations for their target market to have a wider reach.
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 with profound knowledge about their 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, people’s needs change too. Conscious drivers want to have cars that don’t harm our environment. As a result, brands launch the production and introduce electric vehicles to their target audience.
The difference is clear, so the next step is to explore our list of the most successful penetration strategies.
Six 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. Let’s discover the best of them.
- Consider educating your audience. If you are just entering the market, the first thing you should do is to inform 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 ads 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, especially 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 your market share, think of the ways to achieve this objective. Improve the product that customers already like. Knowing the pros and cons of your product means that you have a massive advantage over your competitors. Use these insights, and 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 you scale, access new markets, and reach more potential customers. However, like with any business, it also carries financial risks. That’s why, before you dare to take this bold step, make sure that you have a fantastic value proposition and a strategy to fight your competitors.
- Target certain locations. There are seasonal products and products popular in specific geographical areas. You need to do your research to learn where there is the greatest demand for your products or services. Let’s take a producer of sunblock, for example, and compare the demand for this product in Los Angeles and Seattle. For sure, the demand would be higher in sunny Los Angeles.
- Simplify your 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 evident 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 more accessible 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 an 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 citizens of this country have laptops, its 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. Therefore, the market penetration rate shows companies that produce laptops the potential for their growth in this country.
Simply put, our example indicates that laptop manufacturers have an excellent 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 their industry and estimate whether they will be able to meet their market share and revenue expectations.
To conclude, the measure we have discussed is essential both for startups and well-established companies. It helps assess and analyze the market and determine whether it will contribute to the achievement of goals.
- This article covers the term, reveals the ways to increase your 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: 02.11.2021