What Is Market Penetration?
There are two common ways to define market penetration:
- Market penetration is the measurement of an organization’s sales expressed as a percentage of all of the sales for a given service or product.
- Market penetration can also be defined as the percentage of an organization’s target market that uses their services or products.
How Does Market Penetration Work and How Do You Calculate It?
Every organization produces either a product or service with a particular target market in mind. Market penetration is an expression of how many people within that target market use or buy those products or services versus those that don’t.
Calculating market penetration is reasonably straightforward.
If your organization’s target market is around 25 million people and 12.5 million of those consume your service or product, you have a market penetration of 50%.
12.5 million divided by 25 million equals 0.5, then multiplied by 100 equals 50%.
You can also use market penetration to establish the percentage of your organization’s sales versus the total sales for a particular product.
So, if all companies that produce a specific product within a certain market have total sales of $7 million, and your organization’s sales equal $2 million, then your market penetration would be 28% ($2 million / $7 million = 0.28).
Why Is Market Penetration Important to Understand?
There are many reasons why it’s important to understand market penetration. Here are a few:
- If you have good market penetration, then you can assume there is potential for increased sales.
- If your market penetration is high, it shows that your organization has become established within that market – essentially, you are a market leader.
See our full list of over 50 Small Business Terms here.
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