Whether you’re a large corporation, a thriving business, or a new startup, every company needs to succeed in its market. The best way to do this is by understanding, developing, and acting on a documented strategy to achieve market penetration.
After reading this short blog, you’ll have a strong understanding of market penetration, what it entails, and how to best execute your market penetration strategy.
What is market penetration?
The term has become a common buzzword in the business world, and it’s often misused. Market penetration is defined as “the degree to which a new product or service captures an existing market.” This means to gain market share through any of the strategies outlined in this article can help you achieve greater success with your current products and services.
How to calculate market penetration
You can calculate market penetration by dividing the number of customers by the total addressable market (TAM).
(# of Customers / TAM) * 100 = % Market Penetration
For example, if you sell 10,000 cars and two million licensed drivers live in your geographical area, your market penetration is 0.5% or five-tenths of a percent.
(10,000 Cars / 2,000,000 Drivers) * 100 = 0.5% Market Penetration
What is a reasonable market penetration rate?
The average market penetration for a successful consumer product is around 2-6%. For business products, the range can be anywhere from 10-40%.
You can quickly determine your market penetration goal by comparing national average penetration rates to assess how well you are doing. You may also consider looking at data from nearby areas and data from a local chamber of commerce for additional insights. The Bureau of Labor Statistics provides information about different industries, which includes growth predictions.
Market Development vs. Market Penetration vs. Market Share
Market penetration, market development, and market share are often used in relation to one another, but the three are very different.
Market Penetration
Market penetration takes into account how many customers you have within the total addressable market. A market penetration strategy should be used if you already sell to a target market but want to penetrate that target market even more.
Market Development
Market development aims to increase the number and size of markets that your company operates in by expanding operations, increasing distribution channels, or changing business models. Market development differs from market penetration because market development targets a new market, whereas market penetration targets an existing market. Suppose you plan to begin selling to a new market that you’ve never sold to before. In that case, whether it be a new geographical area, vertical, or similar criteria, you should use a market development strategy to define the actions you’ll use to sell to the new target market.
Market Share
A company’s market share refers to its portion of all sales (or other measures) compared with that same measure for its competitors within the industry being analyzed.
Market share is calculated by dividing the total sales for one company by the market’s total sales and multiplying that number by 100.
For example, if a company has $20 million in sales in an industry with $100 million in sales for the year, they have a current market share rate (20/100)*100 = 20%.
The Ansoff Matrix
The term market penetration stems from the Ansoff Matrix, which can plan strategies for future growth. The matrix is a framework for dividing the market into four quadrants.
These four growth strategies show the strategies needed to enter a new or existing market with new or established products/services.
As you move to the right and up, the strategies become riskier and more difficult for businesses to execute successfully.
Our advice to companies is not to use a business strategy that is more difficult than is required to achieve their strategic goals. Otherwise, they risk failing at executing their plan, which will result in wasted time and money.
Like any other marketing strategy, market penetration has many advantages and disadvantages that marketers need to consider.
Advantages to Market Penetration
Market penetration strategies are effective for a few distinct reasons:
Increase Sales
Marketers often use market penetration strategies to boost sales. By increasing the number of potential customers, companies can drive more business through their channels and sell more products/services.
Improve Brand Awareness
Market penetration also drives brand awareness by getting a particular product or service in front of new audiences.
Enhances Brand Equity
By targeting people who may not be familiar with the service or product, you can grow awareness, which translates into an affinity for your company and its brands.
Improve Product Positioning
The more people who are aware of a product, the better it looks. This causes not only increased sales opportunities for your company but higher-quality customers.
Enhance Corporate Image
When you market to new audiences and expose them to your products/services, they learn more about what you offer and become loyal consumers. This can enhance the corporate image, which increases consumer trust and drives more sales.
Improve Product Visibility
When you market to new audiences within a market, you are presenting your product or service in front of people who have not previously seen it. This improves visibility and drives more sales.
Beat Competition
Selective market penetration could be used as a strategy against smaller competitors by eroding the size of their market share without going head to head with them on all fronts.
Disadvantages to Market Penetration
Market penetration has some disadvantages as well:
Market saturation
The market could have a saturation point where it is no longer profitable to continue trying to enter the market. This can happen when too many competitors offer similar products and services or unique niche markets that don’t provide enough opportunity for profit margins.
Faltering Brand Image
Lowering your prices to enter a market can have adverse effects on your company’s brand and image. It may be necessary to lower prices but, in doing so, you could risk devaluing the product or service, which will drive down demand.
Increased Competition
When companies use market penetration strategies as their only growth strategy, they often increase competition from other brands that enter the market.
Diminished Returns on Investment
Market penetration strategies can diminish returns on investment if there is no new revenue from incremental customers or unprofitable customer acquisition costs outweighing the profit margins of acquired customers.
Attract the ‘Wrong’ Audience
Marketers can use market penetration strategies to capture new customers, but this could draw in the ‘wrong type of audience. For example, if you are a business that sells high-end products, it may not be wise to market those same expensive items at lower prices and saturate markets with people who do not have the funds.
Examples of successful market penetration strategies
Several strategies may be successful in increasing market penetration.
Increased distribution
Companies can target new channels to distribute their products and services to reach more customers.
Niche marketing
Market penetration strategies work best when applied with a niche approach. Marketers identify specific groups of people they want to market to; these could be millennials or married couples without children, for example.
Innovative pricing/pricing adjustments strategy
Marketers may decide that it is necessary to lower prices on items so as not to drive potential consumers away due to the higher cost. This will often cause profit margins per customer acquisition costs to go down, but this might be worth it if you can market enough products across many different markets. Additionally, after re-adjusting your price range downward, you should make sure there is a way to raise prices to capitalize on higher demand.
Differentiated marketing
Market penetration can involve creating a differentiator between your product and those of competitors. This could be as simple as changing the color or size so that customers know it is new or has been updated.
Make It Easier to Buy
Some strategies to consider are making it easier for customers to purchase your products or services. This could involve accepting online payments, having more self-service options in stores, and offering financing to make the product affordable.
Improved advertising campaigns
Companies need to find ways to make their products stand out from competitors and engage with customers through practical marketing efforts.
Higher quality products/services
Quality is one thing people often look for when making purchasing decisions, which means it’s essential for businesses to offer top-notch goods at competitive prices. Take, for example, the iPhone, they’re an expensive phone, but no one questions their quality, which is why customers are willing to pay more than other brands like Samsung or HTC.
Acquisition
Acquiring other companies can be a great way to increase market penetration. There are many ways to make acquisitions, from outright purchases to purchasing shares to have more voting rights or strategic partnerships.
Increased Sales Rep Performance
Sales reps are often responsible for driving market penetration through sales activities. Sales reps and managers should be aligned on what metrics need to be executed. Otherwise, companies risk sales teams performing sales activities that don’t align with the executive’s desired market penetration goals.
Better customer service
One of the best ways to increase market penetration is by providing excellent customer service, which will make your product stand out.
A recent survey found that 96% of consumers say customer service is critical in determining their loyalty to a brand.
Partnerships
To increase market penetration, you must work with partners in the industry.
When you create connections with established companies, your product stands out because consumers see that you’ve been vetted by companies they already trust. For example, if there is already an established distribution network with a significant online presence for products in your industry, it would make sense to partner with them rather than compete.
Partners can also refer customers to you by mentioning your company or offering discounts to encourage them to buy from you.
Industry Experts
Another way to increase market penetration is by accessing industry experts who understand your competition and what makes your products unique. Suppose you can find someone in the field that has experience working for competitors or reviewing similar companies. In that case, they may be able to give you insider information on how best to position yourself against other brands.
Website Optimization
Once your website is optimized for search engines, there will be more opportunities for customers to discover your site.
The majority of web page traffic only sees the first page of search results, which means if you’re not ranking on page one, then it’s likely that customers won’t find your site, and it will be more difficult to use web traffic to drive market penetration.
More competitive prices
Market penetration can also be increased by lowering price points and offering discounts through various methods such as coupons or promotions to attract new customers while keeping old ones happy with lower costs that make them feel like they’re getting more value for their money.
Better customer service
It’s been proven time and again that excellent customer care has a tremendous impact on how satisfied people are with products and services provided by a company–and it leads directly to success at increasing market penetration! Businesses should always strive to provide the best service possible to help ensure their customers are happy–and they’ll continue coming back for more in the future.
Other
We recommend to keep trying different strategies until you find what works best for your company! The most successful companies usually have an arsenal full of methods they use when creating their marketing campaigns: advertising on Facebook, Google Ads, email newsletters; running consulting sessions with executives about how to improve their product or service quality; having customer-friendly policies like 24-hour returns – all these things will help increase market share.
Market Penetration Examples
Coca Cola
The company has increased market penetration by offering the world’s most popular soft drink in over 200 countries and territories by partnering with other outlets such as convenience stores for expanded distribution. Coca-Cola also gains significant exposure during the holidays since the marketing team has aligned Coca-Cola closely with Christmas.
Netflix
This streaming service became popular because it provided a new form of entertainment that wasn’t available before online–and now many people have become loyal customers who enjoy their services so much they continue using them long after initially signing up! It was made even easier when Netflix partnered with Facebook to provide recommendations based on your interests. These partnerships are what helped make the company successful at increasing market penetration.
Final thoughts on market penetration strategy and pricing
The best way to achieve market penetration is by doing what your competitors are not. You have to be willing to do things differently or take a risk for it to work out–and if it does, then you’ll end up with more customers and increased success!