Starting and running a successful business requires you to attract enough customers with your products and services to generate revenue in excess of your company's 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, your company's market share is the percentage of customers that choose to buy your company's products or services. For example, if you own a bike shop in a town with two other bike shops, and your 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, then your 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 your company, then the more revenue your company is able to make. Your 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.
Drawback of Market Penetration
A company can potentially lose market share without losing customers due to increasing market penetration. For example, if your skateboard shop has 500 loyal customers out of 1,000 people who buy skateboards in a certain town, then 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, your shop that sells boards to 500 loyal customers will only have a 33 percent market share, even though your customer base remains unchanged.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.