Market Penetration

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What is 'Market Penetration'

Market penetration is a measure of the amount of sales or adoption of a product or service compared to the total theoretical market for that product or service. In addition, market penetration can also include the activities that are used to increase the market share of a particular product or service.

BREAKING DOWN 'Market Penetration'

For example, if there are 300 million people in a country and 65 million of those people have cellphones, then the market penetration of cellphones would be approximately 22%. In theory, there are still 235 million more potential customers for cellphones, which may be a good sign of growth for cellphone makers. In general, older offerings or industries have greater market penetrations.

Market penetration encompasses the activities used to gain additional market share, such as advertising and price changes, and it serves as a measurement for the amount of market share.

Market Penetration Techniques

Market penetration techniques include any action done for the purpose of increasing overall market share, whether by encouraging consumers of similar products to switch to the company's product or by increasing the amount of the population that can be considered potential customers. Lowering prices and most forms of advertising are done to promote market penetration. Bundling products can also help gain traction in previously untapped portions of the market.

Market Penetration As a Metric

As a metric, market penetration relates to the amount of potential customers that have purchased a specific company’s product instead of a competitor’s product, or no product at all. Most commonly, market penetration in this form is expressed as a percentage, calculated by multiplying the current sales volume by 100, and then dividing that amount by the total sales volume of all similar products, including those sold by competitors.

Market penetration, as a measurement, can be used to determine the success of a company’s marketing techniques, as well as provide insight into how their product is viewed in comparison to a competing product.

Market Penetration versus Market Development

While market penetration focuses on obtaining more customers from those seen as potential customers (often those who have expressed in interest in the product category but not necessarily the business's specific product), market development focuses on increasing the number of potential customers.

This can be accomplished with some of the techniques used to increase market penetration, such as advertising and bundling, but it directs the message towards previously untapped market segments. For example, if a company with a product typically purchased by women is looking to develop the market further, it may choose to direct its advertising towards men in hopes of increasing their interest.