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:
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/disadvantages

Advantages

MPM has some advantages over other valuation methods:
The main criticisms can be summarised as:
'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 and its attractive industry niche.
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.