Valuation using the market penetration model


Valuation using the market penetration model 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 as evidenced by its customer base 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 start up successes are valued using this method, due to the perceived value of customer attention over past profit.

Advantages/ and disadvantages

Advantages

The MPM has some advantages over other valuation methods:
  • Values intangible factors: such as customer attention, which are not otherwise reflected in financial data.
  • Modern: The 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:

Examples

Facebook's purchase of Instagram was based on the MPM. Instagram 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 and its attractive industry niche.
Several other high-profile tech companies have had a valuation based on the MPM including: Google's purchase of Snapseed and Money Supermarket's purchase of MoneySavingExpert.com.