What is Market Penetration – How to Calculate and Increase it?
Market penetration is a statistic that measures the extent to which a product or service will be chosen by the potential customers in comparison to the entire market. It is the ratio of the estimated customer base concerning the total market for that product or service.
New business ventures use this data to determine the market size, reach a larger customer base and establish their brand in the concerned market. Business managers can utilise this data before launching a new product to ascertain its potential market. By determining revenue from the increasing market size, market penetration can essentially boost product development.
Why Is Market Penetration Important in Business?
Market penetration activities provide brands with the perception of how they can increase the market share of a particular product or service in an existing market. It is an important strategy that is adopted by well-established companies and start-ups alike to tap into their target market, successfully sell their product and grow their business.
Market penetration requires some basic information to begin with. A business venture must understand its existing market share, growth pattern, price structure and competitors before introducing a new product.
Example:
Apple Inc. has constantly worked on its primary products like iPhone and iMac. With constant upgrades to its high-end products, Apple’s market share has crossed the 5% mark in India as of 2022. Thus, Apple effectively implements its product placement strategies, thereby gaining a competitive advantage.
How Is Market Penetration Calculated?
Market penetration means identifying the likeability of a product or service and is generally expressed by this formula:
- Market Penetration = Current Sales Volume of a Product or Service / Total Sales Volume
However, for determining the saleability of a current product/service, business ventures use this equation instead:
- Market penetration = (Number of customers for a product / Target market size for the product) x 100
Examples of Market Penetration
An example of market penetration will further explain the outcome of these strategies. The mirrorless digital camera market has been breaking all boundaries in terms of creative capabilities using innovation and AI technologies. Digital camera giants like Nikon, Canon, Fujifilm, and Sony have constantly been working on improving their current product range by introducing software and firmware upgrades.
With an existing market share of 59.8% (as of 2022), Canon is the leading camera manufacturer in addition to their other optical imaging devices like photocopiers and medical equipment. Their immediate competitor Sony (22.1% market share), works on similar market strategies and applies its fancied product differentiation to help consumers identify their products.
With exclusive innovations to their product base, other brands like Fujifilm have also seen a substantial rise in their market share. Fujifilm maintains a specific customer base that favours analogue-style digital imaging.
Its marketing strategies also focus on its retro-styled cameras and ensure secure market domination. To own a product that differentiates from the widely used models, Fujifilm customers have technically ‘accepted’ the penetration strategy introduced by the manufacturer.
This strategy of identifying the target market and tapping into the customer base that can resonate with the vision of the product denotes successful market penetration.
What Is Market Penetration Strategy?
A market penetration strategy helps business managers focus on existing products or services, the customers it caters to, and the strategies of their immediate competitors. It aims to neutralise the risk-bearing factors of a product through marketing and promotional strategies. Following are three market penetration strategies for business entrepreneurs:
- Innovation: When production and distribution are primarily spearheaded by innovation, business ventures save costs and can maximise their revenue. Apart from applying tools like the Internet of Things (IoT) and supply chain financing, they can also reach out to more customers through digital marketing.
- Pricing and Product Modifications: Acquiring market share involves an efficient pricing structure. Companies may choose to initially lower prices to attract more customers and subsequently shift to higher prices. Since prices are competitive, they need to differentiate their products, thereby creating a separate market. Also, they must ensure that the products meet key specifications and still distinguish them from their immediate competitors.
- Marketing and Promotions: Beverage brands like Pepsi and Coca-Cola have subjected their products to multiple revisions in terms of taste, outlook, and marketing. To promote brand consciousness, they constantly compete in terms of marketing campaigns for customer retention.
How to Increase Market Penetration?
Despite the challenges that market penetration occasionally faces, companies still prefer these strategies to gain a thorough insight into their customer’s willingness to purchase its products or services. Greater market penetration implies a gradual increase in sales, brand value improvement and a smarter product positioning.
Following are four different ways of increasing market penetration:
- Price Adjustments: A business may use various price-quantity combinations to align their products with their immediate competition. They may choose to stay competitive even with a different price band but comparable to their offering.
- Adjustments in Marketing Strategies: Creating greater brand awareness through marketing and advertisements is crucial. Digitisation has enabled the usage of digital media for marketing online. For example, Apple Inc. maintains a simple yet appealing approach to positioning its marketing. Instead of using expensive special effects for their video campaigns, they use their products and keep their messages simple.
- Adjustment of Products/Offerings: Bose Inc., for example, constantly refurbishes its older and popular audio equipment for studio or household use. Newer models have incorporated pioneering IoT technologies like 3D sound and WIFI capabilities to meet customers’ growing needs. Like Apple, Bose constantly extends its boundaries regarding market share and customer retention.
- Merging Possibilities: Merging can essentially open new distribution channels and help businesses reach more potential customers. Google’s acquisition of Android 17 years ago, for example, helped them acquire their customer base and market share.
Advantages of High Market Penetration
Business ventures can make informed marketing decisions with access to market penetration strategies. Some benefits of using these strategies include:
- Gradual Growth: Market penetration strategies have helped business ventures to expand their production and increase their customer base. They can apply techniques like price adjustments, innovative social media marketing and constant product improvement to encourage more sales.
- Competitive Advantage: Every business venture wishes to gain a competitive advantage over its products to maximise sales. They can increase their revenue through proper market positioning, interesting marketing campaigns and price differentiation strategies.
- Cost Effectiveness: A primary objective of a market penetration strategy is to identify cost reduction techniques of production, distribution, and marketing. For example, introducing products at a lower price point allows companies to maximise sales and decrease production costs.
Disadvantages of High Market Penetration
Despite the advantages of using market penetration as an effective business strategy, it could have certain disadvantages too.
- Brand Value Reduction: Prolonged usage of market penetration strategies can lower profit margins and tarnish the brand value. Using these strategies in one production line may hurt the other product lines of a business.
- Failure to Meet Costs: Companies often fail to generate enough revenue and profits by introducing market penetration strategies. Subsequently, this lowers their production quantity because of their inability to raise prices. Extreme low prices can also halt production until the business strategies get revised.
- Market Saturation: Market penetration strategies may get saturated due to excessive marketing and price alterations. Thus, penetration for some products could be an unsustainable way of retaining customers.
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Final Word
Market penetration transforms perceptions about a product and, thus, affects customer decisions. Despite high competition, successful penetration allows companies to capture an enormous market share. A greater market share implies sales and profit maximisation.
FAQs
Ans. Market penetration pricing is a costing approach that is meant to initially provide a particular product at a lower price. This helps brands capture a greater market share and introduce new products or upgrades.
Ans. Market penetration works well when companies want to boost the sales volume of their existing product range or introduce new products in an existing market.
Ans. When a business venture identifies its total addressable market (TAM), it can calculate its penetration rate. Penetration rate = (number of customers/TAM) X 100. Experts believe that an average market penetration rate of 2-6% for consumer products and 10-40% for business products are profitable.
Ans. Market development is the process of launching an existing or new product to a new target market. The goal throughout the market development stage is to tap into a new customer base. On the other hand, market penetration strategies help to successfully sell products in an existing market.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
