Starting and running a successful business requires managers to attract enough customers with its products and services to generate revenue in excess of its expenses. Market share and market penetration are common terms in business management that describe different aspects of the relationship between businesses, their products and services and their consumers.
What is Market Share?
Market share describes the proportion of sales in a given market that a certain company controls. In other words, a company's market share is the percentage of customers that choose to buy its products or services. For example, if a small town has three bike shops and one bike shop accounts for 50 percent of the bike sales in the town, while the other two stores each account for 25 percent of the sales, the large store has a 50 percent market share and the smaller stores each have a 25 percent market share.
What is Market Penetration?
The term market penetration is sometimes used interchangeably with market share, but it may also describe a different concept that related to market share. Market penetration is often used to describe the extent to which a product or service is known to potential customers and how many consumers actually buy the product or service. For example, if the target market for skateboard shops is males between the ages of 10 and 25, but only 5 percent of the target market actually buy skateboards, the 5 percent share of consumers that the skateboard industry has managed to attract could be described as the market penetration of the industry in its target market.
Importance of Market Share
Gaining market share is one of the primary goals of every business. The more customers that buy products and services from a certain company, the more revenue the company is able to make. Business can gain market share two ways: by taking customers from competitors or by making new customers aware of products and convincing them to buy the products, increasing market penetration.
A company can potentially lose market share without losing customers due to increasing market penetration. For example, if a skateboard shop has 500 loyal customers out of 1,000 people who buy skateboards in a certain town, it has a 50 percent market share. If other skateboard shops are able to attract new consumers from outside the existing pool of people who buy skateboards and increase the total number of people who buy skateboards to 1,500, the shop that sells boards to 500 loyal customers will only have a 33 percent market share, even though its customer base remains unchanged.