MKT 449 Week 2 Analyzing Market Penetration Example

Two Percent of Hikers in Colorado: Measuring and Improving Market Penetration for a Merino Sock Brand From Burlington

[Student Name]

University of Phoenix

MKT/449: Marketing Analytics

Week 2 Assignment

[Instructor Name]

[Date]

Hollow Brook Sock Company, its markets and all figures are composites written for a model paper.

Week 1 found that Hollow Brook Sock Company, a composite merino wool sock maker in Burlington, Vermont, has plenty of data but no clear picture of where its brand stands. Founder Grace Thibault has a specific decision to make. A Denver sales representative has proposed adding 60 Colorado shops, while her marketing manager wants to spend more in New England, where the brand is best known. Both claim their region offers the most growth. This paper defines market penetration, estimates it for four regions, interprets the results using research on how brands grow and designs a test to guide the decision.

Defining Penetration

Market penetration is the share of a target population that bought a brand at least once in a given period. It differs from market share, which is the brand's portion of total category sales. A brand's sales in a period equal the number of buyers multiplied by the average number of purchases per buyer and the average spending per purchase. Penetration and purchase frequency are therefore the two levers of sales volume.

The Target Population

Hollow Brook's target population is households with at least one adult who hikes, skis or runs regularly. A national outdoor participation survey suggests that about 28 percent of households meet this definition. Applied to census household counts, the estimate gives about 1.9 million target households in New England, 1.7 million in the Mid-Atlantic, 900,000 in Colorado and 800,000 in the rest of the Mountain West the company serves.

Counting Buyers

The website and marketplace provide shipping addresses, so direct and marketplace buyers can be counted by region after removing duplicates by name and address. Shop buyers cannot be counted directly. The annual survey found that about 40 percent of customers buy in shops only, so shop-only buyers were estimated by adding two-thirds again to the number of online buyers in each region and then adjusting by the region's share of wholesale revenue. The estimates are approximate and are rounded accordingly.

Penetration by Region

Estimated buyers in the past 12 months were about 84,000 in New England, 41,000 in the Mid-Atlantic, 18,000 in Colorado and 9,000 in the rest of the Mountain West. Dividing by target households gives penetration of about 4.4 percent in New England, 2.4 percent in the Mid-Atlantic, 2.0 percent in Colorado and 1.1 percent in the rest of the Mountain West.

Purchase Frequency by Region

Among online buyers, whose purchases can be tracked, the average number of purchases per year was 1.6 in New England, 1.5 in the Mid-Atlantic, 1.4 in Colorado and 1.4 in the rest of the Mountain West. The differences are small compared with the differences in penetration.

Interpreting the Pattern

Ehrenberg et al. (1990) documented a pattern they called double jeopardy: across many product categories, smaller brands have far fewer buyers, and those buyers also buy them slightly less often than buyers of larger brands buy theirs. The difference between brands lies mainly in penetration, not loyalty. Hollow Brook's regions show the same pattern. Where the brand is small, it has fewer buyers who buy a little less often; where it is larger, it has many more buyers who buy a little more often.

Fader and Schmittlein (1993) examined the Dirichlet model, which predicts repeat purchasing from a brand's market share, and found that it describes most brands well, though high-share brands showed slightly more loyalty than the model predicted. For a small brand, the research points to one conclusion: growth comes mostly from finding new buyers, not from squeezing more purchases out of current ones.

Comparison Table

New England: target households 1.9 million, buyers 84,000, penetration 4.4 percent, purchases per buyer 1.6

Mid-Atlantic: target households 1.7 million, buyers 41,000, penetration 2.4 percent, purchases per buyer 1.5

Colorado: target households 900,000, buyers 18,000, penetration 2.0 percent, purchases per buyer 1.4

Other Mountain West: target households 800,000, buyers 9,000, penetration 1.1 percent, purchases per buyer 1.4

What Limits Penetration in Colorado

Survey responses from Colorado customers and the sales representative's reports point to two barriers. First, availability: the brand is sold in only 14 Colorado shops, so most outdoor shoppers never see it. Second, awareness: competing wool sock brands founded in the West are well known there. Both barriers limit how many people buy at all.

Why Not Simply Raise Frequency?

The marketing manager has suggested a subscription that ships new socks every six months, arguing that current buyers are the cheapest to reach. A subscription may be worthwhile for other reasons, but the penetration figures and the research suggest it would not change the regional picture much. Even if Colorado buyers purchased as often as New England buyers, sales there would rise by only about 14 percent. Doubling the number of Colorado buyers would double sales. The numbers point toward reaching new people first.

Designing a Penetration Test

Rather than commit to 60 new shops at once, the company will run a controlled test. Kohavi et al. (2009) described how controlled experiments on the web, in which customers are randomly assigned to versions, allow firms to measure the effect of a change rather than guess, and they emphasized choosing an overall evaluation criterion before the test starts. The same logic applies to regions. Over one ski season, the Colorado Front Range will receive two tactics: 20 new shops stocked with a free sample pair program for shop staff and in-store displays, and local search and social ads aimed at outdoor shoppers. Utah, a similar market with similar current penetration, will serve as the comparison region with no change. The criterion chosen in advance is the change in new buyers per 10,000 target households.

What the Results Would Mean

If new buyers in the Front Range rise substantially more than in Utah, the company will expand to the full 60 shops. If not, it will put more money into the Mid-Atlantic, where penetration is moderate and the population is large.

Conclusion

Market penetration measures how many potential buyers a brand reaches. Hollow Brook's penetration ranges from about 4 percent in New England to about 1 percent in parts of the Mountain West, while purchase frequency barely changes. Research on double jeopardy and the Dirichlet pattern explains why reaching more buyers is the main route to growth for a small brand, and a controlled regional test gives the founder evidence before she commits to Colorado.

References

Ehrenberg, A. S. C., Goodhardt, G. J., & Barwise, T. P. (1990). Double jeopardy revisited. Journal of Marketing, 54(3), 82-91. https://doi.org/10.1177/002224299005400307

Fader, P. S., & Schmittlein, D. C. (1993). Excess behavioral loyalty for high-share brands: Deviations from the Dirichlet model for repeat purchasing. Journal of Marketing Research, 30(4), 478-493. https://doi.org/10.1177/002224379303000407

Kohavi, R., Longbotham, R., Sommerfield, D., & Henne, R. M. (2009). Controlled experiments on the web: Survey and practical guide. Data Mining and Knowledge Discovery, 18(1), 140-181. https://doi.org/10.1007/s10618-008-0114-1