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 as evidenced by its customer base and industry niche.
Contents
The process consists of:
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
MPM has some advantages over other valuation methods:
Disadvantages
The main criticisms can be summarised as:
Examples
Facebook's purchase of Instagram was based on 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 (social media fanatics, smart phone users) and its attractive industry niche (smart phone space).
Several other high-profile tech companies have had a valuation based on MPM including: Google's purchase of Snapseed and Money Supermarket's purchase of MoneySavingExpert.com ($120million).