Market Penetration Definition, Rate Calculation Examples and Strategies

Learn all you need to know about market penetration. Find the market penetration definition, how to calculate it, examples and strategies.


TABLE OF CONTENTS

  1. Market Penetration Definition
  2. Market Penetration Rate Calculation
  3. What is considered a good market penetration rate?
  4. Market penetration strategies

Market Penetration Definition

Market penetration is defined as the amount that a product or service is being used by the customers when compared to the total estimated market for that product or service. It is expressed as a percentage. This market penetration definition isn't, however, the only one you’d find. The market penetration definition given here is often substituted with the one for market penetration strategy.

Market penetration strategy means to infiltrate an existing market with a new product from your company, or, to expand the customer base in a market you already function in. Through an aggressive marketing mix, the company aims to increase product sales.

While the former is a measure, market penetration strategy is an activity. In this blog we shall explain both in detail. Both of these are also sometimes called ‘brand’ penetration instead of market penetration market penetration strategy. 

Market Penetration Rate Calculation

The measurement of market penetration follows from the market penetration definition itself. That is, it is the number of customers who buy the product/ service at least once in a given time period against the total estimated market for that product in that period. 

You need to be aware of the number of customers who purchased your product and the target market size. Using these, the penetration rate can be simply expressed as follows.

Market Penetration Rate = ( ( Number of customers / Size of the target market ) * 100 ) %

Let’s take an example of the sale of smartphones in a region. Say company A is selling model X smartphones in the region for 10 months.

Now, assume the target market size is 3 million people.

Of these, 500 thousand people have purchased the smartphone in question.

So, the market penetration rate on infusing the above two values would be:

Market Penetration Rate = ( (500,000/3,000,000)*100 )% = 16.67%

Calculating this percentage enables a company to evaluate their potential within an industry and how interested the customers are in the product. It also gives an indication of the possible market share and the revenue. 

Now that you know how to calculate the rate, how do you determine if it is good? Let’s find out.

What is considered a good market penetration rate?

In the present global market, an average market penetration rate for consumer goods is estimated at around 2% to 6%.

For business products, the average market penetration ranges between 10% to 40%.

To refresh your memory, consumer products are those which are ready to be purchased by the final consumer for personal use. Business products on the other hand are those which are bought by a business for its own use.

Higher market penetration percentages mean better sales and revenue for your company. However, if you find your rate to be on the lower end of the scale, you can try out some of the market penetration strategies given below.

Market penetration strategies

Market Penetration Definition, Rate Calculation Examples and Strategies

When trying to create or grow your market, you have to consider various ways your company’s offering can be made better so that customers want to buy your product. Here are some of the things you can do:

Modify your pricing

You can play around a bit with your pricing strategy to see how it affects your customer base. For example, if you have a SaaS product, you can try monthly and annual pricing options and check whether the number of customers increases or decreases. Increasing or decreasing prices to attract new customers can also be done. Since customers mostly prefer less costly products, try lowering the price without affecting the quality of the product.

Focus on adding distribution channels

Don’t just always distribute your products from the same outlets. Try different distribution channels after due research on what channels have the potential to work. It may be a bit of a trial and error process but you need to experiment with direct and indirect channels, email and online marketing, e-commerce, etc. You have to change tactics and see what works best for you.

Competitor acquisitions

Acquisition is quite a common market penetration strategy in the business world. If you can’t beat your competitors, you can buy them out. This gives you the increased customer base that the competitor had. Alternatively, you can also shut down the competition altogether after buying them. 

Partnerships

An alternative to acquiring your competitors is to partner with them. This way, you can both gain from the customer base and work on optimizing the product or service to get the best outcomes.

Make your product better

Analyze the product or service and see what are the things the customers like about it and what they dislike. When you have knowledge of the pros and cons,  you can work towards making it better so that more customers want to buy what you are selling. Adding features, accessories, or removing them may be necessary.

Simpler buying process

Complicated purchase processes may tend to deter customers from buying your product. For example, if you have a website, make the product easily accessible and add complete details. There should be no glitches in the payment gateway or any of the previous steps. The aim is to make the process totally smooth for your customers.

Target locations and expand to new areas

Your product or service may hit it off in a particular season or location but not be as interesting in another. Say umbrellas would sell better only in certain areas or seasons. Based on this, you need to target those places where there is a huge demand for your product, this would help in increasing demand and sales. Also consider accessing new geographies as this helps scale and reach new customers.