Market Penetration

Market Penetration Calculator

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

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Market Penetration Rate Calculation Example

Suppose a company ended fiscal year 2021 with 40,000 customers.

For the sake of simplicity, we’ll assume that the average selling price (ASP) of the products sold by the company and all other market participants is $250.00.

• Number of Customers = 40,000
• Average Selling Price (ASP) = $250.00

The product of the customer count and the average selling price (ASP) results in the company’s revenue for 2021, or $10 million.

• Total Revenue = 40,000 × $250.00 = $10 million

In the next step, we’ll estimate the size of our company’s target market, which we’ll assume comprises of 1 million potential customers (and the ASP assumption is kept constant).

• Total Number of Customers = 1 million
• Average Selling Price (ASP) = $250.00

The total addressable market (TAM) comes out to $250 million.

• Total Addressable Market (TAM) = 1 million × $250.00 = $250 million

With our inputs all set, we can divide our company’s number of customers by the total attainable customers in the market.

Of the target market, our company’s market penetration rate is 4.0%.

• Market Penetration Rate = 40,000 ÷ 1 million = 4.0%

The market share of our company, as one would expect, given our simplified average selling price assumption, is also 4.0%.

In the real world, however, market share is not always equal to the market penetration rate because competitors price their products and services at different rates.

Market Penetration Strategy: Common Business Tactics

While the market share metric focuses on the percentage of the total market revenue belonging to a particular company, market penetration focuses more on the number of potential customers acquired – albeit, the two are closely tied together.

In particular, companies attempting to disrupt and grab market share from existing incumbents tend to pay more attention to the market penetration rate, which can function as an informative indicator of whether its current strategy and tactics are effective, or if changes are necessary.

Once a company becomes the market leader, i.e. among the top companies in their industry with regard to market share, it now has a target on its back.

Competitors and early-stage companies like startups will start to identify weaknesses in the business model of the market leaders in order to take on their existing customers (and thus their future revenue).

Since market leaders are essentially under attack, it is critical for them to possess an economic moat for their profits to be sustainable over the long run and to take a more defensive approach.

After performing market research and identifying the key demographics (and customer profiles), some common tactics often utilized by new entrants with less market share include the following:

• Price Reductions (“Undercutting”)
• Incentives for Switching Providers (e.g. Special Discounts)
• New Products or Services (or Value-Add Upgrades)
• Strategic Marketing with Targeting Selling Points (i.e. Bring Awareness to Weaknesses)
• Build Switching Costs (e.g. Offer After-Sale Services, Long-Term Contracts)
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