Market penetration is a measure of product or service utilization by customers compared to the total market size for that product or service. However, market penetration can also be defined as the act of entering a market with a product and taking market share from competitors.
Understanding market penetration as a measure
When we talk about market penetration as a measure, we are talking about how much of a product or service is sold relative to its total estimated market.
This is expressed as a percentage such that the market penetration rate is equal to the number of customers divided by the total addressable market (TAM) multiplied by 100.
Determining the size of a market can be difficult and depends on the nature of the product. What’s more, “acceptable” market penetration rates vary from one industry to the next.
For consumer products, the average rate is 2-6%. In business, 10-40% is more common.
SaaS companies would do well to earn 10% of the TAM, while tech leaders such as Apple have a penetration rate of around 19% in the smartphone industry.
For smaller competitors such as Oppo and Xiaomi (7%), there exist opportunities to steal market share from others.
This brings us to the next definition of market penetration.
Understanding market penetration as an activity
When we talk about market penetration as an activity, we are referencing a strategy first mentioned in the Ansoff Matrix developed by Igor Ansoff in 1957.
Unlike market development – where a company enters a new market with existing products – market penetration involves the company selling more of an existing product in an existing market to increase market share.
Market penetration is also the least risky of Ansoff’s four strategies because management is already familiar with the market, owns the necessary infrastructure, and enjoys existing relationships with suppliers, customers, and other key stakeholders.
Some market penetration strategies
1 – Utilizing more distribution channels
Companies looking to increase market share can revamp their marketing strategies to consider the various traditional and digital channels available to them.
While it’s important to only use channels that make sense for the brand, it is worth considering whether a direct, indirect, or dual-channel approach is more effective.
2 – Mergers and acquisitions
Mergers and acquisitions are one of the most effective (and expensive) market penetration strategies.
Some firms prefer to retain the names of acquired brands, while others may choose to incorporate all products under a single brand.
3 – Price adjustments
For a company that wants to increase market share with an existing product, two choices immediately spring to mind: either raise product quality or adjust prices.
Note that adjusting prices does not necessarily mean lowering them. For example, a university that sells an expensive online course may offer a payment plan to appeal to students with less disposable income.
- Market penetration is a measure of product or service utilization by customers compared to the total market size for that product or service. However, it also describes the act of entering a market with a product and taking market share from competitors.
- Unlike market development – where a company enters a new market with existing products – market penetration involves the company selling more of an existing product in an existing market to increase market share.
- There are various strategies available to companies that want to increase market share with an existing product. Those with deep pockets may find mergers and acquisitions the most effective. For others, price adjustments and utilizing different marketing channels may be more realistic.
- Market Penetration as a Measure:
- Market penetration measures the utilization of a product or service by customers in relation to the total market size.
- It is expressed as a percentage, calculated by dividing the number of customers by the total addressable market (TAM) and multiplying by 100.
- TAM represents the potential market size for a product or service, and it’s essential for startups and investors to understand growth potential.
- Acceptable Market Penetration Rates:
- Acceptable market penetration rates vary across industries.
- For consumer products, the average rate ranges from 2-6%, while in business sectors, rates of 10-40% are more common.
- Examples include SaaS companies aiming for 10% TAM penetration and smartphone industry leaders like Apple with around 19% penetration.
- Market Penetration as a Strategy:
- Market penetration as a strategy is mentioned in the Ansoff Matrix by Igor Ansoff (1957).
- This strategy involves increasing market share by selling more of an existing product in an existing market.
- It’s considered the least risky of Ansoff’s strategies as the company is already familiar with the market and its stakeholders.
- Ansoff Matrix for Growth Strategy:
- The Ansoff Matrix is a strategic framework based on whether the market and product are new or existing.
- It helps determine suitable growth strategies based on the market context.
- Market Penetration Strategies:
- Utilizing More Distribution Channels: Companies can explore traditional and digital distribution channels to increase market share. Direct, indirect, or dual-channel approaches can be considered.
- Mergers and Acquisitions: Mergers and acquisitions can effectively increase market penetration, but they can be costly. Brands may retain or consolidate product names.
- Price Adjustments: Adjusting product prices or quality can help increase market share. Price adjustments don’t necessarily mean lowering prices; options like payment plans can be considered.
- Key Takeaways:
- Market penetration involves both measuring product usage relative to the total market and employing a strategy to increase market share.
- It contrasts with market development, which involves entering new markets with existing products.
- Companies can use various strategies for market penetration, such as distribution channel optimization, mergers and acquisitions, and price adjustments.
Related Market Development Frameworks
FourWeekMBA Business Toolbox
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