Definition: Market penetration is the process developed by a firm with the purpose introducing itself in a new industry, market category or segment. The term also applies to the percentage of market share or consumers gained by the company at a specific period of time.
What Does Market Penetration Mean?
All firms experience market penetration at least once in their lifetime. When a product is launched for the very first time, when the company decides to be present in another region or country and when the firm enters a market segment not addressed before, all of them are cases of market penetration. In marketing, there is also a frequent monitoring of the market penetration rate, which is a way of measuring how much potential there is to increase sales and expand the consumer base. The company or the product with higher market penetration is therefore the market leader.
If penetration rate is already close to 100% there is low growth potential. Commonly, the market penetration is estimated as brand sales divided by total market sales, being either in value or in units. However, penetration can also mean number of buyers, consumers or households that regularly use the product versus competitors. Estimation of market penetration is important because it makes possible to identify a market size that is still available to be reached and thus it require growth strategies to be defined.
Example
Lohan Barn is a distributor of stationery products in the Florida State. It sells only to retailers within the state where the firm is located. A new Marketing Manager thinks that there is enough room to increase sales. However, the Sales Manager insists that the firm is the state’s leader and growth will be very difficult. The Marketing Manager then found a report published by the Stationery Industry Association where he found the whole market value of stationery products by state during the last five years.
After analyzing the figures, he realized that Lohan Barn accounted for a market penetration of 20% in the state so there was a large potential market to reach. As a consequence, the firm designed a strategy to expand its customer base not only within the state but also in some near cities of neighbor regions.
