What it is:
How it works (Example):
Companies produce goods and services with a specific population or market in mind. In a broad sense, market penetration is a measure of individuals in a target market who consume something versus those who do not. For example, if a company determines that product ABC has a market of 50 million people and of those 10 million purchase it, then product ABC's market penetration would be 20% (10,000,000 / 50,000,000 = 0.20).
Market penetration can be used to describe the percentage of one company's sales versus total sales for a specific product. For example, if all companies that produce product ABC have total sales of $5 million, and company XYZ's sales equal $1.5 million, then company XYZ's market penetration would be 30% ($1.5 million / $5 million = 0.30).
Why it Matters:
Market penetration for a good or service indicates potential for increased sales. In other words, the smaller a product's market penetration, the more a company should invest in its strategy for marketing that item. For this reason, high market penetration indicates that a product has become established and the company is a market leader.