Market penetration strategy is a growth strategy businesses use to sell their existing products or services to their existing market to achieve higher market share. This approach is used when a company believes it has a good product but is not reaching enough potential customers.
However, market penetration strategies require careful planning and execution. They can often lead to lower profit margins and instigate price wars with competitors.
Also, it’s important to remember that penetrating a market often requires understanding its dynamics, including customer behavior and competitor strategies.
The main idea behind a market penetration strategy is to use various tactics to succeed within a market rather than trying to enter a new one.
Market Penetration Tactics
Price Lowering:
Price lowering is a common strategy used in market penetration. The main idea is to reduce the price of a product or service to attract more customers and increase market share. This strategy is especially effective in highly price-sensitive markets, where price strongly influences customers’ purchasing decisions.
The price-lowering strategy can be implemented in several ways:
- Temporary Price Reductions: These are short-term reductions in price to stimulate sales. This could include promotions, discounts, or sales events.
- Permanent Price Reductions: These are long-term reductions in the selling price of a product or service. This is often done when a company is looking to establish itself in a new market or increase its market share in an existing one.
- Volume Discounts: Offering discounts on bulk purchases can also be a type of price reduction strategy. This encourages customers to buy more products at once, increasing overall sales.
- Loss Leaders: This involves selling a product at a price that is not profitable, or even at a loss, to attract customers in the hope that they will make more profitable purchases.
Price lowering can effectively attract new customers and increase market share, but it’s important to remember that it can also lead to reduced profit margins. Furthermore, if competitors respond by lowering their prices, it can lead to a price war, eroding profits for all companies involved.
Therefore, while price lowering can be a powerful strategy, it’s crucial that businesses carefully consider their costs, competitive position, and the price sensitivity of their customers before deciding to implement it.
Market Penetration Pricing Strategy | Explained with Examples
Increasing Promotional and Distribution Efforts:
Increasing promotional and distribution efforts is another common strategy for market penetration. It can help a business reach more potential customers, increase its visibility, and sell more products or services.
- Promotional Efforts: This includes all activities to increase a product’s or brand’s visibility and encourage potential customers to purchase. This can involve a wide variety of activities, such as advertising (TV, radio, online, etc.), public relations, content marketing, social media marketing, email marketing, SEO (Search Engine Optimization), events and trade shows, and sales promotions (such as discounts, offers, and contests). Increasing promotional efforts can help a business reach a larger audience, increase awareness about its products or services, and stimulate sales.
- Distribution Efforts: Increasing distribution efforts involves making the product or service available in more locations or platforms. This can include opening more stores, partnering with more retailers or wholesalers, entering online marketplaces, and expanding into new geographical areas. The goal is to make it easy and convenient for customers to find and purchase the product or service. By expanding their distribution channels, businesses can reach more potential customers and increase sales.
While increasing promotional and distribution efforts can effectively penetrate a market, it can also be costly. Businesses must carefully consider the potential return on investment and ensure they have the resources necessary to support these increased efforts. Additionally, they need to ensure that their operations can handle the potential increase in demand that could result from these efforts. This might involve increasing production capacity, hiring more staff, or improving supply chain management.
Product Improvement:
Product improvement is another key strategy in market penetration. It involves changing an existing product to make it better, more attractive, or more useful to customers. The objective is to increase the product’s value proposition to entice more customers and thus increase market share.
Product improvement strategies can involve a variety of tactics:
- Adding Features: Enhancing a product with new features can increase customer appeal. For instance, a software company may add new capabilities to its existing program to attract more users.
- Improving Quality: Improving the quality of a product can make it more durable, effective, or reliable. This could mean improving the materials used in a product, refining the manufacturing process, or tightening quality control measures.
- Enhancing User Experience: Making a product easier or more enjoyable can increase its appeal. This could mean redesigning an app’s user interface, simplifying a device’s setup process, or improving the customer service associated with a product.
- Updating Design: Updating the look and feel of a product can make it more attractive or modern, which can draw in more customers. This might involve changing the product’s aesthetics or packaging.
Product improvements can be a potent market penetration strategy as they directly address the needs and wants of the customer. They also provide an opportunity to re-launch or re-market the product, giving it a fresh wave of publicity.
However, product improvements require investment in research and development, testing, and production changes. Companies must carefully consider the potential return on this investment. Furthermore, it’s essential to understand customers’ needs and preferences to ensure that the improvements are valuable. This usually involves market research, customer feedback, and competitor analysis.
Acquiring a Competitor:
Acquiring a competitor is a market penetration strategy often used by businesses wanting to increase their market share rapidly. This strategy involves buying another company that operates in the same industry and market. Here’s how it works:
When a company acquires a competitor, it usually takes over its customer base, products or services, and sometimes even its infrastructure (like stores, warehouses, or factories). This allows the acquiring company to increase its market share instantly.
Beyond market share, there are several other potential benefits to acquiring a competitor:
- Economies of Scale: The combined company may achieve economies of scale, reducing costs and increasing profitability. This might come from manufacturing, purchasing, research and development, marketing, or distribution.
- Reduced Competition: By acquiring a competitor, a company can reduce the level of competition in its market, potentially allowing it to increase prices or gain more control over the market.
- Access to New Technologies or Expertise: The acquired company might have technologies, expertise, or intellectual property that the acquiring company can now use.
- Expansion into New Geographical Areas: If the acquired company operates in regions where the acquiring company does not, this can be a way to expand geographically.
However, acquiring a competitor can also have significant challenges and risks. These include the high acquisition cost, the complexity of integrating the two companies (which can involve merging cultures, systems, and processes), regulatory hurdles (like antitrust laws), and the potential for negative reactions from customers or employees. Therefore, this strategy requires careful consideration and execution.
Merger & Acquisition (M&A) Strategies Explained
Examples of market penetration
Here are a few examples of market penetration strategies:
- Amazon’s Prime Membership: Amazon has continuously increased its market penetration by offering benefits through its Prime membership, such as free two-day shipping, access to exclusive deals, and various digital services. This strategy attracts more customers and increases the frequency and amount of purchases by existing customers. “All-Inclusive” business model of Amazon Prime
- McDonald’s Value Meals and Dollar Menu: McDonald’s has implemented a market penetration strategy through their Value Meals and Dollar Menu, pricing their food products to be more affordable than their competitors. This has helped them to increase their customer base and boost their market share. Marketing Strategy of McDonald’s that makes you “loving it”
- Netflix in Streaming Service Market: Netflix initially penetrated the market by offering a vast selection of movies and TV shows for a lower price than traditional cable TV subscriptions. As they grew, they started producing original content to differentiate and enhance their product offering to maintain their large market share.
- Apple’s Product Ecosystem: Apple’s strategy involves creating a seamless product ecosystem where each product works better in the context of the others. This encourages customers who own one Apple product to purchase others, increasing their market penetration.
- Coca-Cola’s Extensive Distribution: Coca-Cola has penetrated global markets through its comprehensive distribution strategy. Their drinks are available in more than 200 countries, and they constantly work to ensure their products are conveniently available wherever consumers get thirsty. Coca Cola Marketing Strategy, Plan & Mix (4Ps)
Remember, market penetration can be achieved in many ways, and the best approach often depends on the business’s specific circumstances, including its resources, capabilities, and the nature of its existing market.
Market Penetration Formula
Market Penetration can be quantified using a simple formula that gives the percentage of the total available market that a product, brand, or company has managed to capture.
The formula is:
Market Penetration Rate = (Number of Customers for a Specific Brand or Product / Total Number of Customers in the Market) * 100
Where:
- The ‘Number of Customers for a Specific Brand or Product’ is the number of customers who have purchased or are actively using that specific product or brand.
- The ‘Total Number of Customers in the Market’ is the total number of potential customers who might purchase or use such a product or service.
This formula gives a percentage representing the degree to which a product, brand, or company has penetrated its market.
For example, if a company has 50,000 customers in a market that contains 1,000,000 potential customers, the market penetration rate would be (50,000 / 1,000,000) * 100 = 5%.
This means the company has captured 5% of its total available market.
Remember, this is a simplistic measure and doesn’t consider factors like market growth, customer churn, etc. It should be used as a broader analysis rather than a standalone metric.
