Valuation using the Market Penetration Model (MPM) or the growth potential of a company is a method of estimating the value of a company by calculating the depth of its

market penetration Market penetration refers to the successful selling of a good or service in a specific market. It is measured by the amount of sales volume of an existing good or service compared to the total target market for that product or service. Market pe ...

as evidenced by its

customer base The customer base is a group of customers who repeatedly purchase the goods or services of a business. These customers are a main source of revenue for a company. The customer base may be considered a business's target market, where customer behav ...

and industry niche. The process consists of: * profiling a company's type of customer and analysing which complementary companies share these customers. * valuing the barriers to entry into the industry niche that the company operates in.

Valuation overview

The Market Penetration Model focuses on the synergy and opportunities for fast growth between the target company and the acquiring company. It prioritises ability to exploit future customer opportunities over previous financial performance. Many of the

web 2.0 Web 2.0 (also known as participative (or participatory) web and social web) refers to websites that emphasize user-generated content, ease of use, participatory culture and interoperability (i.e., compatibility with other products, systems, and ...

start up successes are valued using this method, due to the perceived value of customer attention over past profit.

Advantages/disadvantages

Advantages

MPM has some advantages over other valuation methods: * Values intangible factors: such as customer attention, which are not otherwise reflected in financial data. * Modern: MPM is relevant to web based businesses whose value is not accurately portrayed in financial figures and hard assets.

Disadvantages

The main criticisms can be summarised as: * Intangible: the assessment of the value of particular customer segmentation and industry niches is highly subjective. * Reliance on competition between buyers: a buyer will not need to pay a premium for future growth potential if there is no competitive bidding process.

Examples

Facebook Facebook is an online social media and social networking service owned by American company Meta Platforms. Founded in 2004 by Mark Zuckerberg with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin ...

's purchase of

Instagram Instagram is a photo and video sharing social networking service owned by American company Meta Platforms. The app allows users to upload media that can be edited with filters and organized by hashtags and geographical tagging. Posts can ...

was based on MPM.

was a relatively small company, employing 13 programmers and was just two years old at the time of the sale. It had no revenue, but was initially valued at $1 billion on account of it highly desirable customer base (

social media Social media are interactive media technologies that facilitate the creation and sharing of information, ideas, interests, and other forms of expression through virtual communities and networks. While challenges to the definition of ''social me ...

fanatics,

smart phone A smartphone is a portable computer device that combines mobile telephone and computing functions into one unit. They are distinguished from feature phones by their stronger hardware capabilities and extensive mobile operating systems, which ...

users) and its attractive industry niche (smart phone space). Several other high-profile tech companies have had a valuation based on MPM including:

Google Google LLC () is an American Multinational corporation, multinational technology company focusing on Search Engine, search engine technology, online advertising, cloud computing, software, computer software, quantum computing, e-commerce, ar ...

's purchase of Snapseed and Money Supermarket's purchase of MoneySavingExpert.com ($120million).

References

{{Reflist Business law Valuation (finance)