Market Penetration: Definition and How It Works

By Indeed Editorial Team

Published April 13, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Market penetration is a metric used in business to measure the number of customers who are using a product or service compared to the estimated total market for that product or service. Businesses often use market penetration to determine whether they should expand into new markets. If you are interested in increasing your revenue, reaching more customers and expanding your products or services, then it may be beneficial to learn how market penetration works.

In this article, we define what market penetration is, explain why it is important and share tips to help you increase market penetration for your company.

Related: How To Create a Growth Strategy Plan for Your Business in 6 Steps

What is market penetration?

Market penetration is a measure of how many customers are using a product or service compared to the total estimated market for that product or service. Businesses use market penetration to determine the size of a potential market and whether they should move into a new market by offering additional services or products.

For example, if there are 300 million people in a country and 65 million of them own laptops, the estimated market penetration for laptops would be 22%. Based on this, you can theorize that there are approximately 235 million potential laptop customers in this country—or that 78% of the market for laptops remains untapped. This information may encourage laptop manufacturers to expand their products to this country.

Related: What Is a Competitive Analysis?

How is market penetration calculated?

Market penetration is expressed as a percentage to show how many potential customers in a market have purchased a specific company's product instead of a competitor's product or no product at all. To calculate market penetration, use the following formula:

Market penetration = (number of current customers) / (total target market size) x 100

The resulting value in this calculation gives you the market penetration of your product or service as a percentage. The larger the percentage is, the more of the market your product or service has penetrated. If your company has the highest market penetration for a specific product or service in an area, then you may be considered the market leader in that industry.

Related: Skimming vs. Penetration Pricing: What You Need To Know

Why is market penetration important in business?

Market penetration is important because it helps companies identify where there may be an opportunity to increase sales. Companies that have a low market penetration in an area may use this data to expand their sales tactics and marketing efforts, while companies that have a high market penetration may have several advantages to market their products.

For example, stores may offer more shelf space or better positioning to a company that ranks as the market leader in its industry because its products are more well known and sought after by customers. This can make it easier for the market leader to increase sales and continue reaching customers.

Additionally, market leaders may be able to negotiate better contracts or deals with their vendors because they order more supplies at once to meet the high demand for their products. This can help decrease the cost to produce their products and increase their profit margin.

Related: How To Develop a Growth Strategy (Includes Examples)

Saturated vs. unsaturated markets

Market penetration can also help companies determine if they should expand into a specific market by showing how saturated or unsaturated the market is. Here are some examples of what a saturated and unsaturated market could look like, along with definitions for each of these terms:

What is a saturated market?

If a market is saturated, it means the volume of a product or service has already been maximized, leaving little room for growth.

For example, if there are 100,000 people in a region and 95,000 of them own microwaves, the estimated market penetration for microwaves would be 95%. Based on this, you can theorize that there are approximately 5,000 potential customers in this region—or that 5% of the market for microwaves remains untapped. This information may discourage microwave manufacturers from expanding their products into this region because the number of potential customers is relatively low.

When a market is saturated, a company can only achieve further growth by developing new product innovations, by taking existing market share from competitors or through an overall rise in consumer demand.

Read more: 6 Steps To Overcome a Saturated Market

What is an unsaturated market?

If a market is unsaturated, the volume of a product or service still has plenty of room to grow. Companies often look for unsaturated markets in order to increase potential business.

For example, if 100 million people are living in a country and 15 million of them currently own smartphones, the estimated market penetration for smartphones would be 15%. This means that there are approximately 85 million potential customers in this country—or that 85% of the market remains untapped. This information may encourage smartphone manufacturers to expand their products to this country because there is a lot of room for them to grow.

Related: Competitive Rivalry: What Is It and Why Is It Important?

Tips to increase market penetration

Increasing market penetration in an area requires a market penetration strategy. Here are some tips to increase market penetration:

  • Adjust the price. Analyze what your competitors are charging for similar products to determine whether increasing or decreasing your price could improve your sales. For example, you may choose to lower the price of your product to increase sales in the short term, then steadily raise the price over time to increase profit.

  • Increase advertising. Expanding your marketing efforts can help you increase brand awareness within your target market. Take the time to fully develop and plan out your advertising campaign to make sure your competition can't easily duplicate it. While you can accomplish this with a short-term campaign, it may also involve revamping your entire marketing strategy.

  • Explore new distribution channels. Consider what distribution channels you are currently using and how including new distribution channels could help you reach more customers. For example, if the primary distribution channel for your products is retail outlets, you might increase your market penetration by expanding to telemarketing or digital marketing.

  • Improve your product or service. Listen to customer feedback to help you identify how you can improve your products or services. Then, make small updates or product changes to solve these challenges for your customers. This can increase brand loyalty and help you develop products or services that are more competitive on the market.

  • Form strategic alliances. Identify potential business partners who already operate within the market you want to expand into. Forming a partnership may help you increase your market penetration by giving you access to additional resources and customers.

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