Market Penetration

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Market Penetration Meaning

Market penetration is a quantitative measurement of the total sales volume of a product or utility in comparison to its entire estimated market. It discovers the possible market size and assists in establishing plans to boost product market share. Simply put, market penetration rate is a relevant aspect of the commercial growth procedure through pricing reduction and other approaches.

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Its advantages include better product positioning, increased sales, enhanced brand equity, and improved product visibility. Also, the penetration strategies comprise competitive pricing, reward systems, collaborations and acquisitions, and intensified outreach activities.

Key Takeaways

  • Market penetration is a metric (or activity) to compute the product’s net sales amount compared to its supposed total market. In terms of market penetration vs market development, the former comes with low risk.
  • It assists in determining and enhancing the product’s overall market share through a few insightful strategies. Also, penetration surges sales and refines brand visibility.
  • The crucial penetration strategies constitute collaborations and procurements, penetration pricing, seasonal offers or discounts, product updates, and aggressive marketing or promotional efforts.
  • Here is the formula to calculate the market penetration rate: Penetration Rate = (Number of consumers/Target market size) *100

Market Penetration Explained

Market penetration involves improved product selling in the current market to secure a bigger market shareMarket ShareMarket share determines the company's contribution in percentage to the total revenue generated within an industry or market in a certain period. It depicts the company's market position when compared to that of its competitors.read more and attain more of the opponent’s clientele. Moreover, it helps evaluate the potentiality of particular goods or services and calculate their market share on a small scale.

Regarding market penetration vs market development, the former implies selling existing products in the prevailing market, while the latter means selling them in a new marketplace. Furthermore, this approach to business growth provides useful information on the market’s perception and customers regarding the product.

Needlessly, a high penetration rate is an ultimate testament to a successful business venture. It signifies that the company is an industry leader with a well-known brand name, good visibility, high sales volume, and robust brand equity. To clarify, it implies more prospects for consistent professional success and growth.

Here lies its formula:

Market Penetration Rate = (Quantity of consumers/Target group size) *100

After every marketing campaign, the firm must regularly track the penetration rate to scrutinize any increment or reduction. That is to say, it will aid in analyzing the campaign’s success and accentuating the changes in penetration.

Moreover, a vital distinction concerning market penetration vs market development is that the risk level is higher in the latter strategy.

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Examples

Here are some important market penetration examples:

Example #1

Let’s assume that a smartphone company has launched its brand-new android phone. Its features incorporate a strong processor, 16GB RAM, 128 GB storage, and a custom-tailored personal voice assistant available in English. However, out of its target group size of 25,000, only 10,000 people have bought the smartphone till now.

Six months after the launch, the company decides to calculate its penetration rate.

Penetration Rate = (Quantity of consumers/Target group size) *100

                            = (10000/25000) *100

                           = 40%

40% penetration rate is an average, but not an exceptional, outcome. So, the company decides to make some changes by partnering with a reputed electronics brand to offer 20% off on earplugs with every mobile purchase. This increases the client base by 20000. So, the penetration rate would be,

= (20000/25000) * 100

= 80%

That is to say, the adoption of the right penetration approach soared the rate by 40%.

Example #2

VitalHub Corporation has recently declared a magnificent boost in market penetration of its UK-based branch, Intouch with Health. Moreover, the latter registered an impressive performance in the penetration rate across the UK’s National Health Service (NHS).

As per the 2020/2021 NHS tables, Intouch possesses at least 1 module sold into 73 out of 140 Acute Trusts in England. Among almost 97,712,855 NHS outpatient consultations, the Intouch platform has processed approximately 55,170,725 (around 56.5%) of them.

Market Penetration Strategy

It indicates the firm’s efforts for expansion by current commodities in the present marketplace. Moreover, the low-risk approach suggests how to augment and obtain market share in an advancing market with identical goods.

To clarify, let’s examine the penetration strategies:

#1 – Magnified Marketing and Promotion Attempts

The business may change its promotional methods and endorse aggressive advertising campaigns to grow brand awarenessBrand AwarenessBrand Awareness is a measure of consumer’s brand recall and brand recognition.read more. Furthermore, it helps in customer retention and gains more of its rival’s clients.

#2 – Penetration Pricing

Market penetration pricing is among the crucial tactics to acquire market share and flourish the earnings, for example lowering the product amount initially to broaden audience engagement. So, the corporation must assess the impact of market share from the shifts in the product pricing schedule. It must also inspect the total recent customers received after the latest pricing scheme launch.

#3 – Product Modifications

The business must observe the response to both its products and the opponent’s products to spot the item’s must-have key characteristics and activities. Then, to surge the market penetration rate, it can change the product and incorporate something distinctive.

#4 – Procurements And Coalitions

An enterprise can purchase the competing business to get its client base and market share or close it down completely. Otherwise, start-up businesses may enter into a strategic partnership with similar organizations to acquire their core audience and widen their market.

Frequently Asked Questions (FAQs)

What Is Market Penetration Strategy?

Market penetration strategy is an approach to obtaining a higher product market share through capitalizing on current products in the existing marketplace.
It includes price movements, aggressive marketing, increased distribution channels, product alterations, market advancement, and partnerships and acquisitions.

What Is Market Penetration Pricing?

Market penetration pricing is a costing approach to initially provide the product or service at a low rate for increased market share. The affordable price tag attracts more eyeballs and can easily penetrate the market.
 It assists build the target market without bearing unreasonable expenditure. In this case, the examples comprise Gillette and Netflix.

When Is Market Penetration a Good Growth Strategy?

Market penetration is a good growth strategy when the firm plans to boost the sales volume of its current goods or services in the existing marketplace. It aids them in obtaining a higher market share through penetration pricing, the introduction of product updates, and other tactics.

This has been a guide to Market Penetration and its Meaning. Here we explain the formula of market penetration rate, its strategies, pricing, and examples. You can learn more from the following articles –

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