Market penetration

Market penetration is the percentage of a particular consumer market that already owns or uses a particular product or service. For example, the percentage of Americans who own smartphones, roughly 91 percent as of 2024, represents the market penetration of smartphones in the United States. Businesses often use market penetration to understand how many more potential sales they could make in a particular market. Market penetration also relates to a growth strategy for expanding a business. If a market is not totally saturated, meaning many people in a particular market do not yet own the product in question, a business could focus on selling that particular product to the people who do not yet own it. This would help the business sell more products without having to alter its products or change its business model. Market penetration is one of several growth strategies that businesses can use.

Background

Market penetration deals with the number of sales of a particular product inside a specific consumer market. A market can refer to any place or medium that brings together parties who conduct economic transactions. These transactions often involve goods and services in exchange for legal tender, though they do not have to include a monetary transaction. The term market also refers to a collection of consumers who are willing to take part in economic transactions. Economists and businesses break consumers into different markets to better measure and understand their buying habits. Understanding this information helps businesses change their business and marketing strategies to sell more of their goods and services. Therefore, when businesses measure market penetration, they often decide which consumer groups to include in the overall market they are measuring.

Different businesses, industries, and fields will measure their markets differently. For example, a company selling online software may consider an entire country or even continent as one market since the product can be sold and delivered digitally. However, a company that sells in-person landscaping services will have a much smaller market since that service must be delivered individually and in person. Markets can be further divided into specific demographic categories, such as gender and age. Companies can also collect data about an overall geographical market and about subgroups inside the broader market. Businesses must understand their markets so they can understand their own market penetration.

Overview

Market penetration refers to the percentage of potential consumers inside a specific market who already have a certain product or use a certain service. Businesses can determine market penetration by collecting data about the number of consumers in a specific market who have purchased or used a product. Businesses measuring market penetration decide which products or services to include in their measurements. For example, to understand market penetration, businesses must include all the goods and services that are identical to their own. If Company A sells cars, it must include all the cars sold by other companies in the same market. However, consumers can also purchase substitute products, which are goods that serve a similar purpose. Company A might also have to take vans, SUVs, trucks, motorcycles, and other vehicles into consideration when determining market penetration.

While market penetration may be the percentage of a market using a particular product, the term also refers to the way businesses can focus on changing the penetration percentage to improve sales and revenue. Most businesses desire and plan for growth. Newly formed businesses often have well-defined plans for growth based on the original business plan and the founders’ goals. However, over time, a business’s plan for growth may become less well-defined. Businesses can use several methods to grow in this stage. To do this, they must choose a growth model that fits their needs and will create the desired outcomes. Businesses creating growth plans can use one or more growth strategies, including audience expansion, product-line expansion, diversification, and market penetration. Audience expansion, also called market development, is an increase in the size of the target market or consumer base that buys a company’s goods. Product line expansion, also called product development, is the creation of new products targeted to existing markets. Diversification is developing new businesses or new products for new markets. Diversification can include taking part in acquisitions and mergers. Market penetration is when a company advertises an existing product to an existing market.

Businesses must use different growth strategies based on their size, age, cash flow, and other factors. For example, a smaller business might focus on creating unique, niche products as the company cannot afford a large marketing budget or an acquisition of a competitor. Businesses that use market penetration growth strategies often use advertising to reach consumers who have not yet purchased a particular product. This type of advertising often focuses more on teaching consumers about the product than on highlighting differences between competing versions of the product.

Some entrepreneurs may be enticed to start a new business with a product that has very low market penetration. This seems like a good investment because a low market penetration could mean that many more potential customers have yet to purchase the product. Therefore, the market has the potential for significant growth. Although this is true, businesses starting in a field with low market penetration may face challenges that could be difficult to overcome. One problem is that a market with low penetration will most likely entice other entrepreneurs, thus creating a great deal of competition. Since entrepreneurs know they can gain more customers with products that have low market penetration, they may be tempted to create their own products. Another possible challenge is that a company’s products and technology can be easily mimicked and improved upon in the future. For example, early computer companies, such as IBM, sold computers when market penetration was very low. Soon, technology began to improve rapidly, and companies with improved designs and better technology became formidable competitors for IBM. Furthermore, large, established businesses are not as nimble or adapt to change as quickly as smaller companies. Therefore, these companies must be cautious about entering a field with low market penetration, since changes to designs and changes in technology will most likely affect that field in the future.

Market penetration is related to market share, which describes the percentage of sales in a particular market that a company controls. Market share represents how many people are buying products from a particular company. For example, imagine that Company A and Company B both sell similar products in the same market. They are the only two companies that sell that particular product in that market. Each company will have a certain percentage of the sales, but the two companies together should make up a total of 100 percent market share since they have no competitors. If Company A has a 70 percent market share, then Company B must have a 30 percent market share. In real life, markets are more complex, so it would be difficult to find all the companies that together make up 100 percent of the market share for a particular product in a market.

Businesses calculate market share by first identifying the sales volume for a particular type of product or service, including those sold by competitors, and then dividing the total. Some use the term market penetration interchangeably with market share; however, market penetration is more commonly used to describe the percentage of a market that has a particular product, regardless of which company the products were purchased from.

Market share and market penetration are related and will both affect business growth and revenue. For example, if new businesses enter a specific market because that market has a low market penetration, those businesses will most likely drive up the market penetration percentage. However, it is also likely that these new businesses will at least slightly decrease market share for businesses already competing in that market. Consider Companies A, B, and C, which produce a specific product. The market penetration for the product was at 50 percent last year. Company A had an 80 percent market share last year. This year, companies B and C began selling their own versions of the product. The market penetration from that product increased to 65 percent this year. However, Company A has a market share of only 75 percent this year. Companies B and C most likely convinced new people in the market to purchase the product and took market share from Company A at the same time.

When businesses use the growth strategy of gaining marketing penetration, they are also trying to increase their market share. If Company A is responsible for increasing the overall market penetration for the product, it will also most likely increase its own market share. Businesses often focus on increasing market share without focusing on increasing overall market penetration. In this case, the company will not try to create new consumers for the product, but they will take consumers from a competitor in the market. To do this, companies must differentiate themselves from their rivals.

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