If your SaaS startup is looking for low-risk business growth strategies, creating a market penetration strategy should be one of the first things you think about. Although, before moving forward, it’s important to identify a clear definition of market penetration as it relates to SaaS and gain a better understanding of what market penetration strategy is by taking an in-depth look at some common examples.
Market penetration definition
Depending on where you look, the market penetration definition could be misleading, as there are two different meanings. As shown below, market penetration can be defined as either a measurement or an activity. In this article, we will review both market penetration definitions and how they relate to SaaS.
Market penetration defined as a measurement
Market penetration defined as a measurement is the assessment of how much a product is being sold relative to the total estimated market for that product, expressed as a percentage. This is also known as market penetration rate.
How to calculate market penetration rate
If you know your total addressable market (TAM), you can calculate market penetration rate with this formula:
Market penetration rate = (number of customers ÷ target market size) x 100
Establishing market size can be tricky depending on the nature of your SaaS product, as a potential customer base could be global and essentially target “everyone.” The more granular you can get with your ideal audience demographics, the easier it will be to make this calculation.
What’s a good market penetration rate?
It’s suggested that average market penetration for a consumer product is 2 to 6%, while business products can range anywhere from 10 to 40%. If you can refine your SaaS product to capture 10% of the TAM in any industry – you’ll probably be doing quite well!
Take the smartphone industry for example – global leaders Apple have a market penetration rate of 19.2%, with Samsung coming in second at 18.4%, Huawei at 10.2%, and a range of smaller brands taking the remainder of the market share to its 100% completion.
The smaller smartphone companies such as Oppo and Xiaomi who are coming in around 7% have plenty of opportunity to increase their market penetration by improving their strategy around pricing, product improvement, consistency, and marketing in order to take more of the market share away from Apple and Samsung.
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Market penetration defined as an activity
Market penetration defined as an activity (see the Ansoff Matrix below) is the process of going to market with a product in an existing market in which current or similar products already live, and taking market share from the other competing companies. This is also known as market penetration strategy.
The Ansoff Matrix
The term market penetration (defined as an activity) stems from the Ansoff Matrix, developed in 1957 by Igor Ansoff, which helps companies plan their strategies for future growth. The Ansoff Matrix is a 2X2 matrix representing four different business growth strategies in which a company either enters a new or existing market, and with either new or existing products.