Market Penetration: Definition and How It Works

If your SaaS startup is looking for low-risk business growth strategies, creating a market penetration strategy should be one of the first things you think about. Although, before moving forward, it’s important to identify a clear definition of market penetration as it relates to SaaS and gain a better understanding of what market penetration strategy is by taking an in-depth look at some common examples.

What is Market Penetration?

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 companys product instead of a competitors 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.

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.

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.

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.

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.

Tips to increase market penetration

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

FAQ

What are the types of market penetration?

Advantages of market penetration strategies include quick diffusion and adoption of your product in the marketplace, incentives to be efficient, discouragement of competition, and creation of goodwill. Disadvantages include lower profit margins, possible harm to your company’s image, and the risk of a pricing war.

How do you penetrate a market?

What’s a good market penetration rate? It’s suggested that average market penetration for a consumer product is 2 to 6%, while business products can range anywhere from 10 to 40%.

What do you mean by market penetration?

It can be achieved in four different ways, including growing the market share of current goods or services; obtaining dominance of existing markets; reforming a mature market by monopolising the market and driving out competitors; or increasing consumptions by existing customers.

What is a penetration strategy example?

Following are the different market penetration tactics:
  1. Price Adjustment. The strategy of Price Adjustment is one of the most widely used market penetration tactics. …
  2. Augmented promotion. …
  3. Distribution Channels. …
  4. Improving Products. …
  5. Upsurge Usage. …
  6. Knowing Risk and Growth. …
  7. Create barriers to entry. …
  8. Be unique and think differently.

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