One of the easiest ways to measure a current market is by looking at market share. Apple, for instance, had 15.8% of the global smartphone market share during the fourth quarter of 2018. Apple was second to Samsung, who led the way with a 17.3% market share. Market share is a measure of how much control a company has over a particular industry.
As a small business owner, one of the goals of your business plan is likely to increase market share. To do so, you need to have successful market penetration strategies. Market penetration is the act of breaking into and selling product in a particular market. The Ansoff Matrix, a key diversification strategy tool that’s been around since the 1950s, defines market penetration as one of the four critical components of business growth.
If you elect to focus on market penetration, there are a few strategies to consider. In this article, we’ll provide you with everything you need to know about market penetration strategies so you can determine which one is best for your business needs.
What is the purpose of market penetration?
Businesses would most benefit from market penetration strategies if they’re looking to increase sales growth of a current product/service with the purpose of increasing market share. Market penetration strategies require a sound understanding of the target market.
Business owners must understand how many competitors are in the market and how well these competitors are doing. Owners need to know whether they’re offering similar products or whether there are key differentiators in their products that can allow them to grab hold of the market.
If owners determine that they maintain a competitive advantage over others in the market, they must determine how they are going to make their products more attractive than competitors’ products. A competitive advantage is useless without awareness. Owners must figure out how they’re going to make consumers aware of this advantage so they can build brand awareness and increase market share.
You should keep two things in the back of their mind when deciding how to increase market penetration:
- You can target existing customers, encouraging them to purchase more frequently
- You can target new potential customers who are currently non-users
Market penetration is one of four components on the Ansoff Matrix. This matrix defines Market Penetration as involving existing markets and existing products and services. The other three growth strategies are:
- Market Development includes new markets and existing products and services. Here, you’re increasing the number of customers you target. You may only have a single product, but you make efforts to connect with different types of customers.
- Diversification involves new markets and new products and services. This is risky, as it involves selling a new product to a new customer base with which you’re unfamiliar.
- Product Development involves existing markets and new products and services. The quantity of products increases under this strategy.
Why is market penetration advantageous?
There are a couple of key advantages that set market penetration strategies apart from the other growth strategies on the Ansoff Matrix.
Create rapid growth
One of the primary benefits of market penetration is that it allows for rapid growth so that you can enlarge your customer base quickly. This is especially the case if you offer low prices to customers. Low prices are an excellent way to lure out customers, which can result in substantial growth and an increase in sales volume. Lower prices can also engender goodwill among existing customers and encourage new ones to try your services.
When clients see that prices are lower than usual, they may believe they’re getting an incredible deal on a quality item. Not only will they be more likely to purchase from you again, but they might also encourage their friends and family members to give your firm a shot.
Lower production costs
Along with boosting sales, employing a market penetration strategy could potentially lower overall production costs. As sales volume increases, companies can turn over inventory more quickly. As a result, they may be free to purchase goods from suppliers in higher volumes at discounted rates.
As you drive down production costs, you’ll end up improving your profit margins. For example, let’s say you sell a product for $10. Initially, it costs $8 to make, netting you a profit of $2. But after securing a better deal from your supplier, the cost drops to $7. If you still charge $10 for the product, your net profit becomes $3.
Fight off the competition
The other primary benefit of market penetration is that it allows you to stave off your competition. Companies are continually competing against one another to increase market share. If you want to become — and remain — a market leader, you must outplay your competition.
If you offer low prices and begin stealing customers from competitors, they will have no choice but to employ alternative strategies as a result. Businesses will need to figure out whether they need to get into a price war and lower their initial price or need to focus on something like product differentiation. This will leave you on the offensive and your competition on the defensive, as they look for ways to regain market share. You may also prevent new entrants into the market during this time.
The disadvantages of market penetration
Although market penetration can be a useful strategy, it’s not without its drawbacks. These are some of the most prominent to consider when determining if a market penetration strategy is right for your firm.
If your projected boost in overall sales volume doesn’t materialize after lowering your prices, then you’re going to feel the consequences. Lower sales volume at lower prices means lower profits, which is a situation you don’t want to be in.
Additionally, companies that use market penetration pricing may find that their new customer bases abandon them when prices start to rise again. When a business does raise rates, it should be prepared for clients to express dissatisfaction, as they are now paying more for the same goods and services.
Just as your new clients may abandon you for the competition if you institute a high price, your long-term customers who have exhibited brand loyalty may also leave you when prices drop. Penetration pricing strategies carry the risk of giving the impression that your products are cheaply made or less desirable. Your clients may opt to go with pricier competitors that they perceive as providing better quality. You must seek to set a price that allows you to gain customers within your designated target market.
Unmet production costs
In theory, market penetration is simple. If you offer a lower price, you’ll increase customers, which can then cause you to lower production costs. However, the actual process is not always so straightforward. Small businesses may not be able to produce enough products to reduce production costs. This is troublesome when competing with large firms.
And if firms produce too much, they’ll be stuck with surplus inventory. This can result in a lot of storage costs, also proving counterproductive. Business owners may need to focus on alternative strategies, such as:
- Marketing campaigns
- Public image
- Product packaging
Lack of results
This disadvantage often comes from a lack of preparation. For instance, if you have a luxury product but opt for penetration pricing, you’ll miss out on customers who were searching for a luxury item and are put off by your “cheap luxury” pitch.
Similarly, if you enter into a market where prices are already drastically low, you’ll have a hard time undercutting the competition. You don’t want to sell a product at a price so low that you’re only breaking even or, worse, losing money.
Market penetration strategies
If you’re interested in a market penetration strategy, there are a few more specific business strategies that you’ll want to consider. All of these strategies fall under the umbrella of “market penetration.”
Penetration pricing calls for firms to adjust the price to attract more customers. Firms could alter the price to be lower, hoping to attract enough buyers to make up for the lower price point. It can also be used as an aggressive tactic against competitors, who will have to lower their prices in response or risk being forced out of the industry.
Lower prices could also drive product demand. If you set a low price, customers will scoop up your product and will, theoretically, be clamoring for you to release more. This product demand could make for a useful marketing strategy.
However, penetration pricing isn’t limited to lower prices. Firms could actually increase their rates as an indicator of quality. This price adjustment could be useful if the market is set particularly low.
Another way to effectively boost market penetration is by investing more in product promotion. Advertising can help create brand awareness. Both short-term and long-term marketing campaigns could be useful when penetrating a market.
Firms should be careful not to rely on promotional ads like, “30% off.” It’s easy for other firms to counter this, and the results could be short-lived.
Adjust distribution channels
Another way to increase market share is by adjusting your distribution channels. For instance, if you’ve primarily sold a product in brick-and-mortar stores, consider opening an online store. Taking a look at distribution channels is an easy way for you to access more prospective customers.
If you make updates to a product, you could attract more customers. This is most noticeably seen in the smartphone industry, where manufacturers continually compete with one another to add new features to phones. They release these features at tech conferences, which generates buzz, interest, and curiosity about the release of the new product.
Is market penetration right for your business?
If you already have a product, you should consider how you can increase your share of the market. Market penetration strategies are one way to do so. There are both advantages and disadvantages to this strategy.
If you research the target market beforehand, you should have a much stronger understanding of whether a market penetration strategy is worthwhile.
This article was produced by the Quickbooks Resource Center and syndicated by MediaFeed.org.
Featured Image Credit: Deposit Photos.