What is Market Penetration?
In every industry, the competition is high with many businesses trying to stay afloat and out win one another. One of the effective tactics businesses leverage would be market penetration. Through an effective market penetration strategy, businesses are able to gain a competitive edge and drive revenue growth. In this article, we explore what is market penetration, the benefits and disadvantages, as well as tips on how to increase market share:
What is market penetration?
Market penetration is the process of a business trying to boost its sales of a product or service and improve its market share within an existing market. Some of the ways included in the process would be trying to gain new potential customers or encouraging existing customers to make purchases through various marketing strategies and activities.
Ideally, the goal of market penetration is to capture the majority of the target market and gain a competitive edge against the competitors. Market penetration can be defined as a measurement or an activity.
Market penetration as a measurement
Market penetration as a measurement involves a business that measures how well its product is being sold relative to the total estimated market for the particular product. This is referred to as the market penetration rate.
How to calculate the market penetration rate
To calculate your market penetration as a measurement, you need to know the total number of customers a company has as well as the total addressable market (TAM) size.
Market Penetration Rate = (Number of Customers / Total Addressable Market) x 100
First, you’ll need to know your total addressable market, which is the estimated total revenue your company will generate if you own 100% of the market share.
Then, to identify your existing number of customers, you can check your sales database or the existing customer relationship management (CRM) system.
Market penetration as an activity
Market penetration as an activity derives from the Ansoff Matrix, which was created by Igor Ansoff and helps companies plan out their strategies to further enhance the company’s growth. It is a 2×2 matrix that represents four different business strategies where companies can choose between entering a new or existing market or producing new or existing products. Thus, this is known as a market penetration strategy.
Market Penetration vs. Market Share
Though they are somewhat related, market penetration and market share, both terms are different.
Market penetration is the price of a product or service that customers use in comparison with the total potential market. The process involves boosting sales of the current products in existing target markets through several strategies of gaining the attention of new customers or encouraging current customers to make purchases.
For example, Netflix offers free trials to users so that they can penetrate deeper into the market by encouraging potential users to become paying customers.
Market share refers to the percentage of total sales within a specific industry or target market in which a company holds as compared to the competitors. In other words, it represents the current position of the company in a specific market.
For example, Netflix has managed to hold a significant market share in the video streaming market as compared with its competitors like Amazon Prime Video or Disney+ whereby most consumers have chosen to subscribe to Netflix over other streaming platforms.
When Is Using Market Penetration Strategy The Right Choice?
Market penetration strategy is the right choice if you’re a business that just started selling new products or services and wishes to boost brand awareness. Hence, market penetration will be a good idea if the market has low brand awareness or little to no competition. Besides that, market penetration works great for businesses who wish to expand their target audience reach or boost the demand in a stagnant market.
However, market penetration works well for short-term goals, but if you wish to focus on long-term objectives, it’s best to balance it out with other marketing strategies as well.
Examples of Successful Market Penetration
Here are a couple of successful market penetrations by notable brands:
1. Spotify
Spotify offers free access versions with ads to users, which helps them to attract many users who eventually decided to go for the ad-free subscription premium plan. This resulted in huge market growth in the audio-streaming industry as they managed to tap into the market for users who weren’t willing to pay for the service.
2. Netflix
Netflix leverages free trials and various affordable subscription plans for users. Thus, they managed to penetrate the market in a short period of time. Since users can try using Netflix for free before committing to a subscription, it allows Netflix to expand its customer reach.
3. McDonald’s
Without a doubt, McDonald’s is known as one of the top fast-food chains all around the world. It goes without saying how they have successfully penetrated the market through affordable value meals and unbeatable offers such as the ‘Buy 1 Free 1’ deals. This helps them to maintain the leading position in the market and make it affordable for customers who are on a low budget.
Pros and cons of market penetration
Here are some of the pros and cons of market penetration for a business:
Pros of market penetration:
- Cost-efficient: Market penetration is one of the affordable strategies in comparison to others such as venturing into a new market. Encouraging your existing customer base to purchase your products or services is much easier and less costly.
- Stay ahead of competitors: If your company penetrates and dominates the majority of the market, it means that they have a stable and solid position. Thus, making it harder for the other small competitors to enter the market.
- Less risk: Overall, market penetration is less risky than venturing into a whole new market. Since the company will be familiar with the existing customer base, it’ll be easier to know how to capture the customer’s attention and leverage from there to grow the business.
- Improve customer relationships: It’s highly recommended for companies to maintain good relationships with customers and ensure they are satisfied with your products or services. Encourage and build stronger relationships with your customers to boost loyalty as well as increase sales.
Cons of market penetration:
- Customer burnout: Aggressive marketing may turn off the existing customers as they could be overwhelmed by the constant advertising.
- Narrow target audience: Businesses can narrow their target market by focusing only on the existing market and customer segments. However, it might limit the potential of expanding further and increasing sales.
- Negatively impact the competitors: It may negatively impact the market penetration as competitors may try to reduce their prices as well. Either that or the other competitors may run out of business, which could be negative as the customers might consider the market isn’t feasible.
- Highly dependent on the market: Since your business will only depend on one market, it might be difficult when the market changes due to unforeseen circumstances or events caused by economic factors or customer preferences.
Market penetration strategy tips
Knowing the right market penetration strategy to use is important to begin market penetration. Here are some of the effective strategies:
- Increase your overall marketing activities: A great market penetration strategy would be to expand your marketing efforts and run various marketing campaigns such as SEO, email campaigns, or paid advertising. This will help to boost your online presence and brand awareness to gain the attention of new, potential customers.
- Improve customer service: Customers are the bloodline of your business. You should handle their enquiries and complaints effectively to ensure ultimate customer satisfaction. Consider providing various channels so customers are able to reach you quickly such as live chat or phone calls.
- Adjust your pricing: Another effective market penetration strategy would be to play around with your pricing strategies by offering various attractive promotions, offers, and discounts. Keep an eye on your competitors and see how they plan their pricing structure.
- Encourage customer loyalty: Retaining customers is better than constantly trying to gain new customers. Try to plan out incentives to keep them coming back for more. For example, have a few exclusive offers for customers who make several purchases within a month and offer them something for free.
- Explore various marketing distribution platforms: The best way to expand your target audience reach would be to engage with a wide variety of distribution channels such as third-party retailers and e-commerce platforms. This enables more access to different types of customer segments instead of just sticking to a few.
- Get to know your target market: The most important market penetration strategy is to know your target market inside and out. That way, it’ll be easier to plan out your marketing strategies after getting a thorough understanding of your customers such as their behaviour and demographics. You can do this through surveys or market research.
Conclusion
All in all, market penetration is crucial for businesses that wish to strive and boost overall growth. Implementing a good market penetration strategy will help a company achieve its goals and stay ahead of its competitors.