You know your startup is ready to go to the next level, but you’re looking for a strategy that allows you to grow and expand while minimising risks. If this sounds like you, then our guide to market penetration strategy could be your route to effective scale and increased profitability.
Your growth strategy options
Businesses have four routes to growth, as laid out by Igor Ansoff in his 1957 Ansoff Matrix. The Ansoff Matrix classifies growth strategies based on the use of a new or existing market and a new or existing product.
The four growth strategies identified in the Ansoff Matrix are:
Product Development
Introducing a new product into a new market.
Market Development
Entering existing markets with existing products.
Product Development
Introducing new products into an existing market.
Diversification
Launching a new product in a new market.
The Ansoff Matrix features the main options for market penetration available to companies across new and existing markets and new and existing products.
So what is a Market Penetration Strategy?
A market penetration strategy is a deliberate focus on growth by offering your product or service to an established customer base where competitors offer similar
products already. Companies can gain market share by tempting customers away from the competition.
A company entering the already established smartphone market, for example, who hoped to tempt consumers away from market leaders Apple and Android, would be
pursuing a market penetration strategy.
Market Penetration Rate vs Market Share
Your market penetration rate is not the same as your market share, although market share can be a valuable metric in evaluating your market penetration strategy.
Market penetration strategy concerns the number of customers in the target market who buy from your company instead of from your competitors. This is known
as your market penetration rate. Market share measures how much of the total sales value in the defined market is captured by your company.
In our example, a company might enter the smartphone market of a particular country that contains 100 million smartphone buyers, who are all potential
customers.
Selling 10 million smartphones into that market would mean a market penetration rate of 10%. If our new entrant is significantly lower priced than the competition, however, then the total value of their sales may only add up to 5% of the total spent on smartphones by those 100 million buyers, giving a them market share of 5%.
How to execute a Market Penetration Strategy
Pursuing a market penetration strategy means deciding on how you’ll differentiate yourself from your competitors.
Here are some examples of how you can stand out from the competition when pursuing a market penetration strategy:
Market Penetration Pricing
One of the most common ways to stand out from the competition is to differentiate through market penetration pricing. Is there unmet demand in the market for a lower-priced option providing better value, or a higher-priced option for a more high-end user experience? Could you offer monthly or annual pricing on your services, or introduce tiered subscriptions? In a crowded market, penetration pricing can capture market share.
Marketing and Positioning
An aggressive marketing strategy can increase brand awareness, establish a clear and differentiated position in the market and help you attract business away from the competition. You might focus on distinctive branding, customer service, user experience, fostering repeat business through a loyalty scheme or tailoring your products and services based on extensive customer research. Carving out a defined niche can lead to successful market penetration.
Product Changes
Making changes to your product to show you can meet customers’ needs better than the competition can help you increase your market penetration rate. Pay close attention to feedback, reviews, and questions and you’ll see opportunities to solve problems for your customers. Listening to men who felt Diet Coke was too feminine to appeal to them led Coca-Cola to develop the successful Coke Zero variant, which tweaked the product and marketing to better meet the market’s need.
Acquisitions, Alliances, and Partnerships
You can radically change the competitive landscape by working with your competition, or if your business is in a position to be able to, acquiring them outright. Acquiring a competitor generally allows you to benefit from their brand and customer base, offering immediate penetration into the target market, however, if you’re not yet at that stage, partnering with others to operate a franchise or forming strategic alliances to run joint marketing campaigns can increase your exposure and widen your reach.
A successful Market Penetration Strategy will combine fresh, innovative thinking, your existing USPs, and a big dose of market knowledge.
Market Penetration Strategy in Action
Android smartphone manufacturers use market penetration pricing to tempt customers away from Apple, who dominate the global smartphone market with a market penetration rate of 19.2%. By offering their handsets at a lower retail price, Android manufacturers capture customers at the point of purchase and hope to retain their loyalty for subsequent purchases by offering innovative handsets at a lower cost than their rivals.
Market penetration strategies in e-commerce frequently feature acquisition. In 2018, Adobe Systems paid $4.75 billion to acquire Marketo, a firm specialising in marketing automation software. This acquisition helped Adobe enter the market for enterprise marketing, competing against established players including Salesforce, Oracle, SAP, and Microsoft.
Market Penetration Rate as a Measurement of Growth
In pursuing a market penetration strategy you can use the market penetration rate as a metric of your growth.
To calculate your market penetration rate, you must have a clear idea of the total estimated market for your product or service. In our smartphone example above, this would be 100 million potential smartphone buyers. Dividing the 10 million smartphones sold by the company in our example by the 100 million total estimated market and expressing the result as a percentage gives us our market penetration rate:
Rate = (10 million customers ÷ 100 million total estimated market) x 100 = 10%
An average market penetration rate for consumer products is estimated to be 2 – 6%, with a range of 10 – 40% for business products.
Regularly calculating your market penetration rate can help you measure the success of your market penetration strategy and evaluate the impact of marketing campaigns and sales activities.
The Advantages of Pursuing a Market Penetration Strategy
Market penetration strategies are considered to be the lowest-risk option of the four growth strategies presented in the Ansoff Matrix. This is due to its use of pre-existing products and markets, unlike the other options which require a new product, a new market, or both.
The established demand in the market offers the potential for highly effective growth, and potentially a high market penetration rate. A high market penetration rate brings further advantages, such as high brand equity, economies of scale, and increased bargaining power with suppliers and sellers.
The way forward?
A winning market penetration strategy could offer your startup a low-risk, high-reward growth strategy. Whichever type of market penetration strategy you choose to pursue, you will enter a market with an established customer base for your product or service.
Do you think pursuing a market penetration strategy might be the way forward for your business? Which strategy will you pursue? Let us know in the comments, and don’t forget to share this article with other leaders seeking to grow their startup.
