New companies and startups are always looking for a market share. But it is not that simple, because the market is already full of competitors that do not allow anyone to enter and disrupt and demand and supply. In this situation, companies can consider the market penetration strategy when they want growth at a lower-risk.
Today, we’ll discuss market penetration strategy, how to calculate it, its types, and pros and cons.
Table of Contents
What is Market Penetration Strategy?
Market penetration strategy is one of the four growth strategies explained in the product/market expansion grid known as Ansoff Matrix. The other three strategies include market development, product development, and diversification.
Market penetration strategy uses for company growth by increasing sales of the current product to the current market with changing the product. Companies use a penetration strategy for the expansion of their business and customer base.
For instance, a company follows the market penetration when it launches a new product in the current market to target the other segment of the existing market.
You may perceive the market penetration in two ways; either an activity or measurement. The measurement is about analyzing the sale of the new product relevant to the total customer market.
How to Calculate Market Penetration Rate?
Now the question is how to calculate market penetration; you can calculate it by following the simple formula;
Market Penetration Rate = Total No. of Customers / Target Market Size * 100
Though the formula is simple, it would be challenging to know the exact size of your market. The target market of products like the software could be the whole world. The more precise information you’ll acquire about the target demographic, the more accurate calculation you’ll have.
What is Good Market Penetration Rate?
The suitable market penetration rate relies on your TAM (total addressable market) and product category. If you’re sure about your target market, put the values in the abovementioned formula, and you’ll get the market penetration.
The average market penetration rate for ordinary consumer products falls within the range of 2% to 6%, and it ranks for business products from 10% to 40%. You should compare your product’s market penetration rate with the average rate to see the difference. If the market penetration rate of your product is lower, then you try to improve it.
For instance, the global market penetration rate of smartphone brands like Apple, Samsung, Huawei, Oppo, and Xiaomi is 19.2%, 18.4%, 10.2%, and 7%, respectively.
Types Market Penetration Strategies With Examples
Companies use the following methods and techniques to implement market penetration strategies;
Modify Existing Products
Here modifying your existing product means that you announce to improve the quality of the product by adopting better standards. It doesn’t require any significant improvement; it’s admirable, though. That’s how a business could keep its customers for a long time and make them buy your product.
FMSI (Financial Management Solution, Inc) is a US company that offers financial information and performance services to individuals and businesses. The company wanted to double its income and increase the market share in a few years.
FMSI started surveying its target customers’ market to better understand their needs and wants. The company spent two years gathering information on how they could better satisfy customers’ needs before making any decision.
Buy-Out Small Competitors in the Market
As the name implies that it means you utilize your capital resources and purchase the small startup competitors. The buying out would help the company to expand its product portfolio and decrease the competition.
The most obvious example of buying out small competitors is Facebook acquiring Instagram and WhatsApp and integrating with the parent brand.
Make a Strategic Alliance
The strategic alliance is a useful option, but it’s challenging to develop an alliance with the companies doing business in the same market. A joint venture is one of the forms of strategic alliances, and the purpose is to share the resources towards mutual benefits.
Barnes&Noble is a books and stocks company, and Starbucks is a coffee service company. Both of the firms developed a strategic alliance to share space and reduce the cost.
Price Adjustment of the Existing Products
The price adjustment of the existing product means that you offer the product at a lower price than competitors. It would instantly help the company increase the market share and gradually earn the reputation of economical product manufacturer. The company could increase the cost over time and improve its profitability.
Scale Your Presence in the Market
Companies could scale their presence in the market in various ways. They sell more products to increase the market share of the firm. For instance, whenever Apple experiences an imbalance in the market, the company increases the sale of its products, iPhones, and iPads. The brand also increases the product range to satisfy the needs of customers.
Companies also increase their market share by expanding their marketing campaigns in foreign countries. The best strategy is to offer your product/service in a foreign language.
Increase Your Promotional Efforts
Marketing and advertising is a powerful tool to increase the brand and product awareness. Companies choose short-term and long-term marketing and promotional activities depending on their budget allocation. It doesn’t matter whatever marketing strategy you choose; it should be thoughtful and well-planned. It’s because we live in a world of cutthroat competition; any promotional mistake would provide a loophole to the competitors.
Advantages of Market Penetration Strategy
Compete with Competitors
Market penetration allows you to compete with competitors. Every market comprises many competitors, and they offer different products/services to attract your customers’ market share. Now it’s a question of your business’s survival, and you have to fight back by offering lower prices. That’s how you push the competitor out of the market.
When you offer prices to increase the market share, it would attract customers’ attention and increase the sale. You have to increase the production rate to keep up with the demand. The repetitive orders would get you a better supplier. In other words, you earn profit through cost-effective ways.
If the purpose of marketing and promotional activities is to increase the customers’ market share, then market penetration does it well. It helps you to kick out the competitors from the market and expand the customer base. In other words, we can say that the fast growth of your business is dependent on lower prices and market penetration.
Disadvantages of Market Penetration Strategy
If a specific market is already working on the low price range and entering the market with a low price strategy, it won’t work. It’s because the competitors have already won’t the heart of customers. Now, you should consider entering the market with a new pricing strategy.
If your company is running a business in luxury items, then the market penetration strategy would have the worst impact. It would send a message of being a cheap brand, mostly when you’re selling many luxury items at premium prices. One low price product would ruin your entire portfolio and brand image that you have established over the years.
Some luxury businesses make the mistake of offering one or few products at a lower price. The luxury customers would start doubting the brand as somewhat cheap and inexpensive. It decreases the overall sale of the company.
It’s not always easy to manufacture products at an economical price range. When you lower the price under such circumstances, it will impact the profitability of your business. Therefore, your focus should be product quality, brand image, packaging, and marketing.