Define the High Market Penetration Index

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Market penetration is one way to measure a company's success.
Market penetration is one way to measure a company's success. (Image: Stock Market image by Paul Heasman from Fotolia.com)

There are many techniques for measuring the value of a company. Corporate success is quantified using parameters influenced by different aspects of performance. A company's market penetration is one of these numbers that offers useful information about the entity's past success. But market penetration also provides clues about potential future success. The mathematics behind market analysis can be quite complex, but the concept is relatively simple. It is possible to quickly understand what a high market penetration means.

Concept

Market penetration refers to the portion of products sold in a particular category or sector by one company in relation to all products sold by all companies in that business. This is often related to brand name recognition, but a company with high market penetration may not necessarily have strong brand name recognition. Any market can by analyzed using market penetration quantifiers. The "market penetration index" is calculated in different ways depending on the application, and is based on the market penetration.

Examples

McDonald's is an example of a company with high market penetration. In the fast-food sector, McDonald's sells a large portion of all the products consumed. The company also enjoys strong brand name recognition due to this high market penetration, as nearly everyone in the world has heard of McDonald's. By contrast, computer chip manufacturer AMD is Intel's main competitor. Both enjoy high market penetration, but computer buyers may have never heard of AMD, thus it does not enjoy strong brand name recognition. Even free products can be measured this way. The Web "browser wars" are based on the market penetrations of Internet Explorer, Firefox and other browsing programs.

Market Penetration Formula

Market penetration, also referred to as "market share," and the "market penetration index," are both calculated using simple ratio formulas. Market share is simply the total number of products sold to consumers by one company divided by the total sold by all companies. If a company sells one product out of a total of 10 sold to the public, it has a market penetration or market share of 10 percent. In the case of the browser wars, if Internet Explorer has a 67 percent market penetration, this means that approximately two-thirds of all the browsers in use worldwide are Internet Explorer.

Market Penetration Index for Sectors

The market penetration index can mean different things. At the sector level, it analyzes overall current demand by the public for a particular type of product, rather than a particular brand of product. The index then compares this number to the potential future demand for a product. A new product on the market may have had little success so far; however, there may be a large population that could ultimately benefit from the product. The low current demand divided by the potential future demand results in a small market penetration index. This low number suggests room for considerable growth.

A high market penetration index means that the public is fairly saturated with a particular type of product that is usually provided by many manufacturers. As there is not much room for growth, competition between companies becomes fierce as they compete for the few remaining customers. Prices often drop as a result.

Market Penetration Index for Companies

Some companies use a different calculation and interpretation for the market penetration index. Rather than analyzing overall consumer demand for their sector, they study their success in comparison to their competitors. But rather than focus on the raw market share, they compare their performance with the average performance of competitors. This is common in hotels, where the market penetration index studies an individual hotel's occupancy compared to the average occupancy rates of all other hotels in a particular area. A high reading indicates the hotel is performing better than most others.

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