Penetration Rate – Definition, Principles, and How to Calculate It in 2021
The penetration rate is an indicator expressed as a percentage. It makes it possible to determine what proportion of a population has a product/service. It is therefore a key data to accurately assess the market coverage of a product or service. This is why it is also called “market coverage“.
In this article, we will give you a definition of the penetration rate and explain how to calculate it.
Table of contents
- Penetration rate: Interest and uses
- How to calculate the penetration rate?
- Two other types of rates
- Penetration rate and market share: two different concepts
- In conclusion
Penetration rate: Interest and uses
Definition of ‘penetration rate’
The penetration rate is one of the best indicators for evaluating a market. As explained at the beginning of this article, it refers to the percentage of people reached by an advertising campaign who have purchased a product over a given period of time.
There are several indicators that can be used to analyse markets and estimate their development potential. There are also performance indicators to evaluate communication actions. But for a company that wants to know its place in a market, the penetration rate is the most relevant.
Why use a penetration rate?
This rate provides companies with valuable information about their market coverage and allows them to know how much their product or service is being put to use. Based on this information, companies can decide what marketing actions to take to improve or strengthen it. Hopper, one of the most downloaded applications in North America, is a good example of a company using marketing to improve its penetration rate. Read more about it in this article..
A measurement tool for advertising campaigns
Before launching an advertising campaign, it is necessary to assess the current demand for a product in relation to the total potential market. Following this campaign, calculating the penetration rate will allow you to assess the impact of the advertisement that has been done. In other words: this rate allows us to know if an advertising campaign has made a product/service more popular in regards to the current sales volume.
In this sense, the penetration rate and the analysis of its evolution are essential to measure the degree of effectiveness of a marketing campaign and its impact on the company’s activities.
An indicator to assess the potential of a market
It is also an essential tool for measuring the potential of a market. This is particularly the case for the launch of a new product or service. The indicator will be used to assess the market coverage rate of this new offer. It should be noted that in order to obtain the most reliable rate possible, it will be necessary to carefully evaluate the potential demand for this offer.
The importance of reliable calculation
In order to use the penetration rate properly, it must be calculated rigorously and with unquestionable reliability. Having a reliable rate will allow you to :
- Measure the impact of a communication campaign.
- Assess the potential turnover of a company over a given period.
How to calculate the penetration rate?
Here is the formula to use to calculate your penetration rate:
Penetration rate = (Number of consumers or users or customers / total number of people targeted) x 100
This is the ratio of the number of users of a product or service to the total population that is targeted by that product or service. To put it another way, the penetration rate makes it possible to calculate the ratio between the number of people attracted by a product and the entire population to which these people belong. This calculation gives an indication of the strength of a brand. By calculating the ratio between the buyers of this brand and the total number of buyers of goods/services similar to the brand, we can determine the popularity of the brand.
Example of a company’s penetration rate
Let’s take the example of a company that sells customised clothing. Assuming that its market has 4 million potential customers, and that the company already has 1 million customers in that market, its coverage rate would be :
- (1,000,000 / 4,000,000) x 100 = 25%
The penetration rate of this company will therefore be 25%.
An important note: it is not impossible to exceed 100% by adding up all the coverage rates of companies in a market. Indeed, in some sectors of activity, some people may be customers of two companies at the same time.
Two other types of rates
Penetration rate in a trading area / at the point of sale
This rate also applies to trading areas. In the retail sector, it is the ratio of the number of customers in the shop to the total number of people in the trading area. In other words: the rate corresponds here to the number of customers that the outlet manages to capture in a given area.
The calculation of the penetration rate then becomes :
Penetration rate = (Number of customers / total number of people in the trading area) X 100
To take an example, if the result of this calculation is 4%, this means that one person out of 25 is a customer of the outlet studied, within a specific perimeter. Depending on this result, the shop can take decisions to improve it. For example, by undertaking communication actions or by working on its réfélocal referencing.
In addition, this calculation is also a very useful tool for calculating the proportion of customers with the shop’s loyalty card in relation to the total number of customers.
It refers to the share of consumers likely to experiment with a brand new product or service. More concretely, it is the percentage of new consumers in relation to the total number of consumers of the product.
Penetration rate and market share: two different concepts
Penetration rate and market share are two different principles. Market share refers to the share of a company’s turnover in a sector of activity in relation to the total sales of companies in that sector over a given period of time. Note that market share can be expressed in terms of turnover and volume (number of products or services sold).
The penetration rate gives an indication of the level of maturity ofa market. The higher the rate, the more mature the market. If the coverage rate exceeds 80%, the market is considered “saturated”. When launching a brand new product or service, the calculation of the rate will help to assess the first years in which the product/service will be launched.
Another important difference is that the penetration rate does not take into account the sales volume associated with each customer. In other words, this indicator will not separate the customer who buys one product from the customer who buys 10 units. As a result, a company with a large proportion of “heavy users” will gain market share than its coverage rate.
In short, what should we learn from the penetration rate and the need to master this marketing indicator? If this data is rich in information, the analysis of its evolution over time will be just as crucial. Indeed, if this rate increases, it will demonstrate the effectiveness of a company’s marketing operations. It will also show a positive trend in terms of customer loyalty.
On the other hand, a penetration rate that is decreasing from one period to another will show that the competition has an advantage. This rate will then be a clear signal that you need to readjust your marketing strategy. A marketing agency can help you with this.