If you’re looking to start or expand your business, you need to have a firm understanding of how to enter and grow within your chosen market. This requires you to take what you’ve learned during your market analysis to develop a market penetration strategy for your business. So, what exactly is a market penetration strategy and how do you develop one?
Market penetration definition
Market penetration is the amount that your business is able to sell a product or service to customers compared to the estimated total available market (TAM). This is a measurement that can help you define the serviceable available market (SAM), which is the portion you estimate that you can acquire. Additionally, it can serve as a baseline for developing a strategy to increase your service obtainable market (SOM), or the subset of customers that you can realistically acquire.
How to calculate market penetration
Market penetration is both a measurement and an activity. You can actively engage in market penetration, which is your attempt to enter or expand into a given market. The actual measurement is a specific assessment regarding how much you anticipate selling or actually do sell as a percentage of the total available market. You can find this measurement using the following equation:
Market penetration rate = (Number of customers / target market size) x 100
While the action and measurement may seem like two separate activities, you can actually leverage your market penetration measurement to develop a market penetration strategy. While it may not be exact, since it’s based on market size estimations, it can still provide you with a legitimate number to measure your actual results.
Think of it as a baseline for what’s feasible and what your penetration rate needs to be for your business to be viable long-term. Keeping track of this measurement and noting any positive or negative changes can help inform your return on investment for any marketing or sales campaigns. To stay up-to-date, it’s best to review this measurement before and after a campaign to gauge performance. You can also add it into your monthly plan review sessions if you’re actively running campaigns without a distinct end date.
Market penetration explained
To truly take advantage of knowing your market penetration rate, you need to understand what that rate means for your business within the market. How does your current standing affect brand perception? How do you compare to your competitors? Is there any room for growth? Any threat of new entrants?
In general, you want your market penetration to be high. The higher your market penetration the more likely that you have some or all of the following market advantages:
- You’re an industry or market leader
- You’re well-established in your industry
- You can leverage economies of scale
- You have a stronger pricing position
- Brand awareness for your business is high
- You have well-established distribution channels and vendor relationships
You don’t necessarily need to have the greatest market penetration for your business to be viable. In fact, when you’re just starting out you’ll likely be starting with a minor portion of the market. So how do you grow your business and achieve greater market penetration? By using your research to develop a market penetration strategy.
What is a market penetration strategy?
A market penetration strategy is a product market strategy whereby an organization seeks to gain greater dominance in a market in which it already has an offering. A subset of this strategy often focuses on capturing a larger share of an existing market through a process known as market development.
Market development involves the actionable steps you intend to take to expand your attainable market. However, instead of working with customers in your current market, you instead focus on obtaining an underserved, non-buying, or new portion of the market.
For example, let’s say that you’re a SaaS company focused on enterprise-level business email management. It’s a highly competitive space, with well-established brands and similar feature sets, where customer service, pricing, and ease of use are primary advantages. As a new entrant, or established business looking to grow, instead of attempting to claim current enterprise customers from your competitors, you can develop another market segment.
You may see an opportunity to provide a lighter version of your software to smaller businesses. Or by focusing on your collaboration toolset, you can pitch the software to single accounting firms with the intent of rolling it out to the broader chain. Doing this grows your current customer base, expands the available market, and simultaneously improves your brand equity within the enterprise email management market.
How to create a market penetration strategy
Now, market development isn’t always possible, meaning that you’ll need to still focus on growing your business by acquiring customers already served in a given market. One of the best ways to start developing your market penetration strategy is using the Ansoff Matrix. This tool highlights the possible paths you can take to pursue growth.
Typically, product development and diversification are the more costly and riskier options, while market development and market penetration are considered to be lighter risk strategies. More than likely, you’ll be leveraging multiple growth strategies within your broader market penetration strategy. But, the path you take does again depend on your current market penetration, competitor positioning, as well as market expectations.
To make sure you’re prepared to evaluate and execute different strategies, start with a market analysis and your penetration rate before working with the Ansoff Matrix. Then start to explore the different market penetration strategies available to you.
Market penetration strategy examples
As you conduct your market analysis and begin to map out specific steps, here are a few market penetration strategy examples you can try to implement.
If you’re struggling to move products or services, it may be wise to lower or increase your pricing. This can set your business apart from competitors by either presenting yourself as a low-cost alternative or premium option. You can also explore expanding your pricing options, creating different levels for specific customer needs that lock unique features or support behind higher tiers.
Keep in mind that any pricing adjustments may also require a certain level of product development, especially if you pursue the premium route.
Launch a new product or service
If you’re considering launching a new product or service, be sure that there is a need for it. Treat this new launch like you’re restarting your business. Interview customers, conduct market research, forecast sales and expenses, and be sure that a new product is viable for your business.
As said before, this may stem from your pricing adjustment strategy. If this product or service is similar to your current offerings, be sure that you cleanly separate it with pricing and messaging. If it’s a complimentary product, try to find ways to cross-promote, and improve the lifetime value of current customers.
Adjust your current products
Another option is to simply change or update your current products or services. Start by defining specific niche segments within your target market to help define what changes are necessary. This can be a new feature, less expensive components, or unique variants, among other things.
The key here is to focus on improving economies of scale by leveraging the core components of something that you already sell.
Partner with or acquire other businesses
Sometimes the market is too competitive to make any real traction. Maybe one business is so large and well-established, that minor or emerging competitors simply cannot strengthen their foothold due to current resources and the smaller customer pool available to them. In this case, it may be wise to partner up or acquire a competitor to unify your customer base and resources.
This is also an effective strategy when entering a new market. Instead of working from the ground up, your brand will immediately become associated with a business that has a well-established presence.
Adjust your marketing campaigns
In some cases, you may not need to make such drastic changes to your strategy. Instead, you can always focus on optimizing your current marketing spend. This may be as light as adjusting your messaging within advertisements or offering different incentives. Or something as large as relaunching marketing campaigns or creating a loyalty program.
In any case, this requires you to look closely at your target audience and how your competitors position themselves. Is there a pain point no one is addressing? Is your copy and imagery not presenting your mission or value proposition effectively? Or maybe you just aren’t spending enough on the right marketing channels.
In any case, look at your current return on investment for marketing activities and identify any areas that require optimization. From there, begin to test and layout different strategies, potentially around some of the pricing or feature adjustments we already covered. Continue to look at performance over time and be ready to make gradual adjustments if something isn’t working.
Connect market penetration to your overall business strategy
Keep in mind that market penetration should not be conducted in a bubble. Any strategies you develop or steps you take should connect to your broader business strategy and help you reach specific milestones. One way to keep this top of mind is to incorporate a review of your market penetration rate and any ongoing strategies into your monthly plan review.
This will encourage you to look at financial forecasts, milestones, and current tactics all at once. If you find that a current penetration strategy doesn’t support your larger goals, it may be wise to back off or reallocate resources until it becomes relevant. Or, it may present an opportunity to adjust your business plan to fit the opportunity you’ve found. But without reviewing it alongside your plan and financials, you’d never know for sure.