The market penetration index is the percentage of the total market that uses the type of product you sell. A market penetration analysis looks at the entire market to see how many potential customers can still be converted into using the type of product or service that you sell. If there are, for example, 200 million households and 10 million of them own a home automation device, then the market penetration is 5%. This can help inform your overall marketing strategy so that you can tap into the motivations of your target audience.
Market Sector Versus Company Share
The market penetration index definition typically looks at the sector as a whole and isn't necessarily the percentage of the market that uses your particular brand or the amount of market revenue generated by your brand, which is your market share percentage. Instead, a market penetration analysis looks at the entire market for a particular type of product or service.
However, market penetration can also be used as a company-specific metric to analyze the portion of the market that they've succeeded in converting to their product. Using the home automation system example, if Amazon has sold only 2 million home automation systems, it has penetrated 1% of the total market. Understanding market penetration can help inform a brand's marketing campaigns. Amazon's strategy could be to try to convince the 8 million people using a competitor's device to switch to Alexa or it could focus on educating the 190 million people who don't have any device at all to purchase from them.
Only New Conversions Count
Although sales are used to calculate the market penetration index, replacement sales aren't included in that calculation. Only "new" customers or brand conversions are part of the calculation. If someone already owns a home automation system like Amazon Alexa and it breaks, their purchase of a new Alexa doesn't affect the market penetration for home automation systems.
Likewise, if this customer was unsatisfied with Alexa and wanted to purchase a competitor like Google Assist, this brand transfer would affect market share percentages and market penetration indices for Amazon and Google, but not the overall market penetration index for home automation systems.
Examples of the Market Penetration Index
When a new technology is introduced, the overall market penetration is low because not many people own the technology. For example, when horses and buggies represented the major mode of personal transportation, gas-powered cars initially had a low market penetration when they were introduced. Of course, nowadays gas-powered cars have an extremely high market penetration because anyone looking for a personal vehicle typically looks for this technology.
But automotive technology continues to develop, and some of those gas-powered vehicles are being replaced with hybrid or fully electric engines. Therefore, the market penetration for electric engines is currently low, but it grows each time a consumer decides to abandon old technology and embrace the new.
Other examples of high market penetration include computers versus typewriters and smartphones versus flip phones. Consumers have plenty of choices when it comes to which brand of computer or smartphone to purchase, but the point is that they definitely want to purchase these products. Very few people have yet to purchase a computer or smartphone.
Determining the Total Market
Don't make the mistake of assuming that everyone in the world is part of your market and therefore a factor in your brand's market penetration index. Yes, some products are ubiquitous, such as computers, cell phones and cars in the United States, in which your total market is virtually the entire population. But let's take a look at some other examples in which this isn't the case.
If you sell dog toys in the United States, your market isn't the country's entire population, but rather the dog-owning population (even if you think everyone should own a dog!). Likewise, if you sell breast pumps, your market is naturally narrowed down to new mothers. And if you've created an app that only works on iOS, then your market includes all iPhone users running the minimum required operating system.
Now that you have an idea of how large your true market is, let's talk about how you can take advantage of a low market penetration index or remain competitive in a high market penetration index.
What Does This Mean for Brands?
If your business sells a product with a high market penetration, your main goal is to convince buyers that your brand is way better than the competition. If you instead run a marketing campaign that tries to convince people to buy this type of product for the first time, you'll miss the mark. And the opposite is true for low market penetration because in that case, you need to educate consumers about why this technology is better than what they currently use.
Think about cell phone carrier commercials: Wouldn't it be strange if Sprint, Verizon and AT&T tried to explain how a cell phone could change your life? You're already fully educated in the advantages of a cell phone because you already own one and so does most of the market. Therefore, cell phone carriers focus mainly on setting themselves apart from the competition, explaining their particular perks and benefits like high-speed data, free roaming, unlimited text messages, bundles, contracts and prices.
Now think about a new technology that you haven't yet embraced, such as our electric car example. You probably need to be convinced to make the leap to this technology, so any advertisement or marketing campaign will need to address your concerns, including cost and reliability. At this point, the market penetration index for electric cars is too low for consumers to be concerned with choosing one competitor over another; their concern is whether to adopt the technology at all.
Handling the Middle of the Road
Many brands sell products with middle-of-the-road market penetration. For example, we can take a look at wearable activity trackers. These devices have been around long enough that many consumers know they exist, and some major name brands have emerged in this niche, such as Fitbit and Garmin. When the market penetration index is neither low nor high, it makes sense for brands to tailor their marketing campaigns to both educate consumers and explain why their brand is superior to competitors.
Market segmentation is key at this stage. You need to understand that you're speaking to different audiences with different needs and then craft a message that resonates with them and deliver it through the right platform. On the one hand, you'll be reaching out to the "open" portion of the market, which includes the people who have never used an activity tracker, to make an "educational sale."
But you can also make a "replacement sale" by reaching out to people who already use a competitor's activity tracker and want to upgrade. Or, perhaps they use a basic activity tracker made by your brand and want to now enjoy the features on your more advanced models. These sales won't affect the market penetration index, but they're nonetheless important for your overall strategy.