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Chapter 13
Market Penetration

Measurement Need

To understand the company’s efforts to increase sales via market share growth (i.e., more customers in a given time period) and/or increased usage of its products and services (i.e., more sales to existing customers in a given time period) compared to total market sales volume of comparable offerings in that same period of time.

Solutioni

Market penetration measures the sales volume of the company’s products to a target segment relative to the total target market sales for a defined period of time.

M_{p} = \frac{S_{i}}{T_{i}} \times 100

$M_{p} = \frac{S_{i}}{T_{i}} \times 100$

Where

Mp = market penetration

Si = sales to target segment in time i

Ti = total market sales in time i

Target segment is a predefined target customer group in a specific market area within a specific time period. Total market sales describes the added opportunities available to the same companies for the same products under the same conditions. Market penetration is influenced by type of product, pricing, new marketing appeals, and competitor actions. Some products lend themselves to significant short-term added potential, such as consumer nondurables (i.e., food, beverage, and grocery products). To illustrate, discounting popular grocery items can drive temporary demand and increase the total dollars spent in the market than would otherwise have “naturally” been spent. In contrast, other products have lower short-term added potential, (i.e., sports and entertainment events). Sports and entertainment events have a narrower appeal (everyone needs food, not everyone needs to attend a professional football match). Additional marketing spent on promoting the event will generate increased costs per remaining seat.

A corollary measure is known as the market share index. Market share index sheds light on which areas of the company’s marketing need adjustment to improve market penetration. It is closely related to market share, providing more specific information about the factors that influence customer purchase decisions and, ultimately, market share.

The market share index formula is:ii

M_{s i} = P_{a} \times P_{P} \times B_{i} \times A \times P_{p u r}

$M_{s i} = P_{a} \times P_{P} \times B_{i} \times A \times P_{p u r}$

Where

Msi = market share index

Pa = product awareness (the number of people aware of your product in your target market compared to the overall population in the target market)

Pp = product preference (is the product appealing?)

Bi = intention to buy (is the price attractive?)

A = availability of product (where can the product be found?)

Ppur = product purchase (is buying the product a positive experience?)

Beginning with market penetration, assume we are analyzing the market for traditional sushi in Sydney. The market is highly fragmented, meaning multiple competitors are vying for market share, but no single sushi restaurant dominates. Current demand indicates a market totaling $10 million in sales annually. However, past industry marketing efforts indicate that price promotions boost business by 25%. Therefore, the market potential is $25,000,000 ($20,000,000 × .25 = $5,000,000. This result is added to the $20,000,000 current demand to determine potential demand). Therefore,

The result shows a market penetration of 80%. For most markets, this result would be quite high, suggesting that acquiring the remaining potential customers would be increasingly expensive on a per-customer basis. However, let’s assume that, based on current market dynamics, a price promotion at this time will lead to business increases of 75%. Therefore, the market potential is $35,000,000 ($20,000,000 × 0.75 = $15,000,000. This result is added to the $20,000,000 current demand to determine potential demand), as follows:

M_{p} = \frac{$ 20, 000, 000}{$ 25, 000, 000} \times 100 = 80 %

$M_{p} = \frac{$ 20, 000, 000}{$ 25, 000, 000} \times 100 = 80 %$

Market penetration is now 57%, which suggests there is more room for all sushi companies in the market to improve their growth.

Now let’s look at growth opportunities for individual companies in this highly fragmented market. Using the second formula for market share index, let’s assume that a sushi company’s market research reveals the following statistics:

Pa = Product awareness = 52% (48% are unaware)

Pp = Product preference = 76% (24% find it unattractive)

Bi = Intention to buy = 55% (45% do not intend to buy)

A = Availability of product = 40% (60% product not available)

Ppur = Product purchase = 38% (62% had a disappointing purchase experience)

Plugging these figures into the formula reveals that our sushi restaurant has a market share index of 3.3%:

\begin{array}{l} M_{si} = P_{a} \times P_{p} \times B_{i} \times A \times P_{p u r} \\ M_{s i} = 0.52 \times 0.76 \times 0.55 \times 0.40 \times 0.38 \\ = 0.033 \\ = 3.3 % \end{array}

$\begin{array}{l} M_{si} = P_{a} \times P_{p} \times B_{i} \times A \times P_{p u r} \\ M_{s i} = 0.52 \times 0.76 \times 0.55 \times 0.40 \times 0.38 \\ = 0.033 \\ = 3.3 % \end{array}$

The sushi restaurant has data indicating that the overall sushi market is only 57% penetrated by all competitors and that their own share is 3.3%. Therefore, with the right mix of promotions, their market share has significant upside potential. Had the market penetration rate been closer to 100%, the task of improving share grows significantly since all companies are vying for a limited set of remaining customers.

A helpful framework when conducting market penetration analysis is the Ansoff Matrix, conceived by Igor Ansoff in his 1957 Harvard Business Review article “Strategies for Diversification.”iii Ansoff describes growth opportunities in a simple two-by-two matrix, with products across the horizontal axis and markets along the vertical access, as shown in Figure 13.1.

The Ansoff Matrix is a useful framework because it provides clear guidance on the marketing growth choices if market penetration is the objective—growth opportunities are limited to existing products in existing markets, and a corresponding set of activities available to successfully penetrate existing markets. The activities are:

Increase market share in the existing market—attract customers within the segment who are either buying competitor products or who fit the target profile but have not yet committed. Marketing tactics, such as advertising, revised pricing, short-term promotions, and/or increased investment in customer relationship development and personal selling can help inspire additional interest and purchase. The challenge is the expense of regularly creating fresh and new marketing campaigns that resonate with the market.
First mover advantage—typically represented by an innovative product that attracts the market’s attention before the competition has a chance to enter, allowing the firm to capture a dominant market share initially. Maintaining a long-term majority share is challenging without substantial investment in continuous marketing and research and development (the latter also begins to shift the company from a market penetration to a product development growth strategy), and even those added investments are not a guarantee of ongoing success. Technology markets, including software and consumer electronics, often use this approach.
Deep price penetration—an aggressive, low-price strategy designed to steal share aggressively from competitors by undercutting them on price. A classic example from the 1980s in the United States, was when Japanese chip manufacturers flooded the market with below-cost chips to gain market share. The primary challenge is how to raise prices to improve profitability when customers have been trained to expect a lower price.
Increase product usage from current customers—done by developing new uses for the product and/or creating customer loyalty plans. Examples include the airline and hotel industries. The challenges are the cost of staying current on customers’ data, the accounting liability of accumulated points programs or frequent flyer miles, and the cost of finding new personalized marketing approaches.

Impact

Market penetration helps companies assess success selling to a target segment in a given time period. The market share index analyses “go-to-market” efforts. For example, in the above analysis, 76% of the people who are aware of the sushi restaurant’s product prefer it, which is a reasonably strong level of preference for the product. Interestingly, only 52% of the market is aware of the product. Therefore, the company can focus its marketing efforts on communications to increase awareness. If the sushi restaurant succeeds in increasing awareness to 75%, then their market share index increases from 3.3% to 4.7%.

\begin{array}{l} M_{s i} = 0.75 \times 0.76 \times 0.55 \times 0.40 \times 0.38 \\ = 0.047 \\ = 4.7 % \end{array}

$\begin{array}{l} M_{s i} = 0.75 \times 0.76 \times 0.55 \times 0.40 \times 0.38 \\ = 0.047 \\ = 4.7 % \end{array}$

Another area of improvement is in the buying experience. Only 38% of the buyers had a good buying experience. Therefore, point-of-sale training that teaches how to improve customers’ purchasing experience might be a viable solution. Assume the company does this and is able to improve these numbers so that 62% of the buyers report a positive experience. Keeping the aforementioned increase in awareness and factoring in the improved buying experience yields a market penetration of 7.8%:

\begin{array}{l} M_{s i} = 0.75 \times 0.76 \times 0.55 \times 0.40 \times 0.62 \\ = 0.078 \\ = 7.8 % \end{array}

$\begin{array}{l} M_{s i} = 0.75 \times 0.76 \times 0.55 \times 0.40 \times 0.62 \\ = 0.078 \\ = 7.8 % \end{array}$

Be aware that understanding each variable in the market share index has its own challenges. Product awareness describes the percentage of customers in the target market who are aware of a company’s product. If awareness is low, then it indicates there is potential to increase awareness. At the same time, it will be expensive to increase awareness since more will be invested in advertising, sales promotions, and other marketing communication efforts. Improving the buyer’s satisfaction at the time of purchase will also cost money. However, if the goal is to improve penetration and beat the competition, then these would be sensible investments.

As the Ansoff Matrix shows, the cost to improve market penetration is likely to be higher due to investments in pricing, advertising, and promotions. Firms focusing on market penetration may maintain consistent success due to their unique relationship with customers, developed over many years, therefore reducing the need to seek growth in the other quadrants. However, success invites competition, so it is a matter of time before competitors enter, forcing you to weigh the merits of pursuing the other quadrants.

To determine potential market demand, marketers must conduct and analyze customer research, evaluate trends, establish product pricing, determine distribution, and create promotional campaigns to generate awareness. Sales management works directly with customers, developing relationships, understanding customer profiles, and determining specific solutions to address customer needs. Once a customer base is established, the challenge is how to continue growing this increasingly valuable asset.

Collecting the data for the market share index requires marketers to conduct research to gather relevant data for each of the formula’s variables. The data can be gathered from surveys, with the exception of product preference and availability of product. Product preference can be calculated using a technique called conjoint analysis. iv Availability of product is determined through an analysis of your own distribution asking:

–Is the product available and easy to buy?

–What is the number of actual distribution points compared to the total number of distribution points? This provides a percentage of share or penetration.

i P. Kotler, M. L. Siew, H. A. Swee, and C. T. Tan, Marketing Management: An Asian Perspective. (Upper Saddle River, NJ: Prentice Hall, 2003), 137

ii P. Kotler, M. L. Siew, H. A. Swee, and C. T. Tan, Marketing Management: An Asian Perspective. (Upper Saddle River, NJ: Prentice Hall, 2003), 137.

iii H. I. Ansoff, ”Strategies for Diversification,” Harvard Business Review 35, no. 2 (September–October 1957).

iv H. I. Ansoff, “Strategies for Diversification,” Harvard Business Review, 35, no. 2, (September–October 1957).

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Table of Contents for Chapter 13: Market Penetration

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Chapter 13 Market Penetration

Measurement Need

Solutioni

Impact

Table of Contents for
Chapter 13: Market Penetration

Chapter 13
Market Penetration