Marketing Metrics: Understanding Market Share and Related Metrics

May 26, 2006

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2.4 Penetration

NOTE

Penetration is a measure of brand or category popularity. It is defined as the number of people who buy a specific brand or a category of goods at least once in a given period, divided by the size of the relevant market population.

Market Penetration (%) = Customers Who Have Purchased a Product in the Category (#)/Total Population (#)

Brand Penetration (%) = Customers Who Have Purchased the Brand (#)/Total Population (#)

Penetration Share (%) = Brand Penetration (%)/Market Penetration (%)

Penetration Share (%) = Customers Who Have Purchased the Brand (#)/Customers Who Have Purchased a Product in the Category (#)

Often, managers must decide whether to seek sales growth by acquiring existing category users from their competitors or by expanding the total population of category users, attracting new customers to the market. Penetration metrics help indicate which of these strategies would be most appropriate and help managers to monitor their success. These equations might also be calculated for usage instead of purchase.

Construction

Penetration: The proportion of people in the target who bought (at least once in the period) a specific brand or a category of goods.

Market Penetration (%) = Customers Who Have Purchased a Product in the Category (#)/Total Population (#)

Brand Penetration (%) = Customers Who Have Purchased the Brand (#)/Total Population (#)

Two key measures of a product's "popularity" are penetration rate and penetration share. The penetration rate (also called penetration, brand penetration, or market penetration as appropriate), is the percentage of the relevant population that has purchased a given brand or category at least once in the time period under study.

Example: Over a period of a month, in a market of 10,000 households, 500 households purchased Big Bomb brand flea foggers.

Brand Penetration, Big Bomb = Big Bomb Customers/Total Population =500/10,000= 5 5%

A brand's penetration share, in contrast to penetration rate, is determined by comparing that brand's customer population to the number of customers for its category in the relevant market as a whole. Here again, to be considered a customer, one must have purchased the brand or category at least once during the period.

Penetration Share (%) = Brand Penetration (%)/Market Penetration (%)

Example: Returning to the flea fogger market, during the month in which 500 households purchased Big Bomb, 2,000 households bought at least one product of any brand in this category. This enables us to calculate Big Bomb's penetration share.

Penetration Share, Big Bomb = Big Bomb Customers/Category Customers =500/20,000= 5 25%

Decomposing Market Share

Relationship of Penetration Share to Market Share: Market share can be calculated as the product of three components: penetration share, share of requirements, and heavy usage index.

Market Share (%) = Penetration Share (%) * Share of Requirements (%) * Heavy Usage Index (I)

Share of Requirements: The percentage of customers' needs in a category that are served by a given brand or product (see Section 2.5).

Heavy Usage Index: A measure of how heavily the people who use a specific product use the entire category of such products (see Section 2.6).

In light of these relationships, managers can use this decomposition of market share to reveal penetration share, given the other inputs.

Penetration Share (%) = Market Share (%)/[Heavy Usage Index (I) * Share of Requirements (%)]

Example: Eat Wheats brand cereal has a market share in Urbanopolis of 6%. The heavy usage index for Eat Wheats cereal is 0.75 in Urbanopolis. Its share of requirements is 40%. From these data, we can calculate the penetration share for Eat Wheats brand cereal in Urbanopolis:

Penetration Share = Market Share/(Heavy Usage Index * Share of Requirements) = 6%/(0.75 * 40%)=6%/.30 5 20%

Data Sources, Complications, and Cautions

The time period over which a firm measures penetration can have a significant impact on the penetration rate. For example, even among the most popular detergent brands, many are not purchased weekly. As the time period used to define penetration becomes shorter, managers can expect penetration rates to decline. By contrast, penetration share may be less subject to this dynamic because it represents a comparison between brands, among which the effects of shorter periods may fall approximately evenly.

Related Metrics and Concepts

Total Number of Active Customers: The customers (accounts) who purchased at least once in a given time period. When assessed at a brand level, this is equivalent to brand penetration. This term is often used in shorthand form––total number of customers––though this would not be appropriate when a distinction must be made for ex-customers. This is discussed in more detail in Section 5.1 (customers of a specified recency).

Acceptors: Customers who are disposed to accept a given product and its benefits: the opposite of rejecters.

Ever-tried: The percentage of a population that has tried a given brand at any time. (See Section 4.1 for more on trial.)

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