Market Penetration

Market penetration is the assessment of how much a certain product or service is being sold within an addressable market. This is a good measure of how well certain goods or services are doing compared to others in a business, or across businesses in an industry.
Understanding market penetration helps in identifying and increasing the market share of a certain product or service, or the business as a whole.

Market Penetration Calculation and Example

Take for example a new delivery service "DELIVER" that opens in a small city with 100,000 people living there. If DELIVER offers delivery services for 10,000 individuals, then we say its penetration rate is:

The result is 10%, meaning that this is the rate of market penetration for DELIVER. This also means that the rest of the market (90%) is untapped by the company and is a good expansion target.
 
Note that this can also be calculated for an industry as a whole, not only a single business. Take for example the coffee industry in a country with 10 million. Let's say that the coffee drinkers are 2 million in this country. Following the same equation, this means that the market penetration for coffee in this country is 20%, which leaves the rest of the potential market (80%) untapped.

Relevance of Market Penetration with Market Share and Other Concepts

When we declare a number or rate for market penetration (as in the previous examples), we automatically have the inverse as "untapped market". See in the DELIVER example we had 90% untapped market, where the coffee example outlined 80% untapped market. But what does untapped mean?
 
To differentiate tapped and untapped market, we need to understand the relation between Market Penetration, Market Share and relevant concepts. Let's take them one by one.

• Mass Market: Everyone who can potentially purchase the product or service. The mass market doesn't necessarily represent potential customers: there are demographic and psychographic differences that limit the reach to the general population.
• Addressable Market, also known as the Total Available Market (TAM): Total demand for a product or service and relevant products and services. This group is more defined than the general population, but is still not the direct focus of a single business or a company since there is still a variation in the channels, preferences, and attitudes of customers in TAM.
• Target Market: The target market is a group of customers that a business targets with its products and services. This does represent the target of the business, rather than actual customers.
• To detail this further, we find the Market Share: Market share is business metric that is represented as the percentage of total sales generated by a certain business in a given industry. The Market share represents actual customers who actually buy the business's products and services.

So you see, untapped customers outside the market share don't necessarily mean that these customers fall under the target market. They may be customers in the mass market uninterested in your business offering, and thus it makes little sense to seek all those in the untapped market. To classify potential customers and understand who to seek, it is important to construct a Customer Profile (Avatar) and see where you can find such customers and seek them actively. We provide a detailed guide with examples on defining your avatar here.

How to Improve Market Penetration Rate?

Market penetration can be enhanced and improved through several strategies that can be used together, including:

1. Well-thought Pricing Strategy

   Usually, lowering the price of a product or service can lead to more sales. This is a traditional way of thinking that is often getting challenged with new pricing techniques powered by the internet and online businesses. Pricing is more of an art and a science that is not easily done just by lowering price tags. In fact, the opposite sometimes happens as customers perceive higher-cost products as more quality ones. A well thought pricing strategy depends on the business models financial structure represented as costs and income streams.

2. Marketing Strategies

   Good and far-reaching marketing can help increase Market Share, and increase the number of people who are ready to receive your offer. Mixing online and offline marketing and utilizing the correct avatar (customer profile) to seek are essential elements in excelling marketing efforts.

3. Mastering Channels

   Channels are sometimes overlooked in the business model, but in fact they form a main determining factor in the success of business marketing and sales, and increasing market penetration. Having the right mix of delivery, marketing, and customer servicing channels in a post-COVID world that depends highly on online transactions and business operations is essential. Learn more about channels here.

4. Having an Edge in the Market

   Finding the right Competitive/ Unfair Advantage is important to utilize the power of the offering and beat competition. Learn how to build your competitive advantage here.

5. Addressing Risk and Market Adoption

   Risk is an important and tricky element to handle and estimate. It forms an opportunity to utilize new audiences and markets, but it poses threats of new untested technologies and markets. To better address risk and utilize it as a catalyst to increase market penetration, the market adoption curve needs to be studied and evaluated against the business and its products or services to discover future potential and how the adoption can move with time.

6. Partnering with the Best

   Partnerships are not only important to get the best deals and prices when purchasing raw materials and equipment, but also form a strategic edge over competition and a strong appeal to gain market share and increase penetration. Partnerships with other businesses and entities have many forms, each with its own pros and cons. Learn more about the partnerships here.