How To Beat Your Competitors With Market Penetration
Market penetration can be an effective way to grow your business. It’s a low risk strategy that has been used by some of the planet’s biggest companies to steal market share from their competitors. Google did it with their Nexus phone, Nike with their trainers, and McDonalds with their burgers, to name a few examples.
In this article, we’ll explore the concept of market penetration, discuss some market penetration strategies, and cover some pros and cons to help you decide if it’s the right strategy to grow your business.
What is market penetration?
Market penetration is when a business captures market share for a type of product or service that already exists. For example, Australians already buy portable air conditioners, and a company may decide to create their own air conditioner to take market share from other companies. Or they might already be selling an air conditioner in the market, and they decide to spend more on advertising to capture market share from their competitors.
For services, we can look at food delivery apps. Deliveroo is one of the original technology-driven food delivery services, with user-friendly software that allows people to easily order food. For a new food delivery company to capture market share, they would need to adopt a market penetration strategy that might include lower pricing, aggressive marketing, or an even better app (or all of these). Otherwise, why would the user switch?
Market penetration comes from the Ansoff Matrix—a business framework that allows you to identify market growth opportunities. It’s considered a low risk strategy because the market already exists, with similar types of products and services being sold by other companies. Their success means that your company can do the same, provided you have a solid market penetration strategy. Compare this with diversification—selling a new product in a new market. This is one of the riskiest growth strategies you can take because your new product is untested, and you’re selling it in an unfamiliar market. There’s a lot of unknowns that must be illuminated with quality research.
The Ansoff Matrix. Image from Lighter Capital
There’s two definitions of market penetration: an activity (or strategy) as described above, and as a measurement. When used as a measurement, market penetration is a way to measure how much a product or service is being used compared to the estimated size of the market. It’s how you’d measure your success. In this article, we’re focusing on marketing penetration as an activity, and the ways that you can use it to grow your business.
What to include in a market penetration strategy
Because market penetration is basically a way to increase your market share, a market penetration strategy can include pretty much anything that helps you to sell more products or services.
These are some of the most common tactics you can employ in your strategy.
Market penetration pricing
If you’re ready to sell a new product in an existing market, like a smartphone to compete with Apple, Google, and Samsung, setting a low price can be an effective way to gain initial market share. Once achieved, you can increase your pricing later on. This is known as penetration pricing, and is the most common market penetration strategy.
People’s buying decisions are often driven by price, so by offering a cheaper good-quality alternative, there’s a chance you’ll lure them away from the competitors and potentially turn them into loyal customers who will stick with you as you slowly increase your pricing. This is a crucial aspect of penetration pricing—you must do everything you can to create loyal customers, otherwise your increase may prompt your customer base to revert to “price first” decision-making, and switch to a cheaper competitor.
Penetration pricing is a longer-term strategy where your profits won’t necessarily increase with your sales volume, because your margins are too low. It’s not as drastic as loss-leader pricing, where your product is less than its production cost, but you probably won’t grow until you start increasing your product pricing in line with your competitors. Your competitors might even decide to lower their own pricing, drawing you into a potentially ugly pricing war.
Lower pricing can also mean lower quality in people’s minds, so this tactic can create a “budget” brand image that you may not want to encourage.
If you’re planning on using penetration pricing to tempt customers away from your competitors, you’ll need a solid plan for building loyalty. There’s so much you can do to foster customer loyalty—high-quality products, great customer service, and loyalty programs, to name a few. Check out our comprehensive article on how to build long-lasting customer loyalty for your business.
The stronger your marketing, the more people you will reach, and the better impression you’ll make on them. Investing in quick-win marketing campaigns like advertising is a time-tested way to increase market share, and can be supplemented by slow-burning campaigns like content marketing and SEO, which can work wonders over time.
If you invest heavily into marketing campaigns that work, your market penetration strategy will soar.
One of the most direct ways of increasing your market share is by simply purchasing a competitor. Business acquisition is complex and not without its faults, but if you have the time, money, and knowledge to do it properly, it’s a fantastic market penetration strategy.
Improved product or service
If we can afford it, most of us will happily pay a premium for a quality product. This is why Apple is one of the richest companies in the world—it makes useful, high-quality products that people love to use.
Improving the quality of your product or service can work as a killer market penetration strategy. As the quality increases, so do the positive customer reviews, followed by your sales and market share.
There’s tons of ways you can improve a product or service:
- Add useful features, or improve on its existing features
- Make it easier to use
- Make it more robust
- Test it more thoroughly
- Improve your customer service
A strategic partnership is a mutually beneficial relationship between two businesses, in which each company has something that the other needs. This might be knowledge, skills, resources, or something else, which is shared between each other and allows each partner to run a more profitable business. The greater the profit, the more market share you’ll capture.
New marketing/sales channels
There’s lots of ways to sell or promote your products and services—social media, email, adverts, content marketing, and SEO to name a few. Every marketing channel has the potential to drive sales, boost brand awareness, and carve out your own space in the market. Be sure to experiment with new channels, because your competitors may already be doing so.
Online marketplaces are platforms where you can list your products and reach potentially huge audiences. eBay, Amazon, Catch.com.au, and Kogan are just a few examples, with millions of collective users purchasing products from the platform. If you’re not already selling on these platforms, why not?
Potent sales process
As with your products, there’s always improvements to be made to your sales process (find out how to get better at closing sales leads in this article). You can become better at identifying new leads, qualifying them, pitching to them, closing deals, and more. If you run an ecommerce business, your website is your salesperson, and you can improve its conversion rate through good design practices such as UX and conversion-centred design. Improving your sales efficiency can take some work, but it raises the return on investment for your marketing and offers a predictable way to increase your market penetration.
When a company has strong branding, we are able to recognise it instantly. It makes a memorable impression on us, and so we’re more likely to remember it when we need one of its products or services. This makes it an effective market penetration strategy.
You’ll need consistent colours, typography, image use, and language use. All of these things can be laid out in a brand style guide—a crucial document to keep your branding consistent across your various departments, and crystallise your brand in people’s minds.
Customer journey map
Image from Nielsen Norman Group
The journey that a person takes from finding your company to buying your products is a complex one, with various stops, starts, emotions, and decisions along the way. A customer journey map allows you to visualise the many ways that a customer interacts with your business, and includes their actions, pain points, emotional states, and the solutions they reach to solve their goals.
When everything is mapped out, you have a much clearer picture of the process people go through when buying from you, which enables you to improve your sales, marketing, customer service, and other key processes. When done well, you’ll steal market share from your competitors.
Learn more about mapping your buyer’s journey here.
Market penetration strategy advantages and disadvantages
These are the biggest market penetration strategy advantages and disadvantages, to give you a clearer idea of whether you should take this approach.
- When you use penetration pricing:
- You have a clear competitive advantage, which allows you to grow quickly and build a large customer base.
- Your brand will become recognisable more quickly.
- As demand increases, you may save money on production costs due to bulk supplier pricing, and higher volumes being made.
- You may find yourself improving every area of your business, to turn it into a well-oiled machine.
- You might discourage new competitors from entering the market.
- When you use penetration pricing:
- You may seem like a low-quality “budget” brand. This can be particularly damaging if you have other products that are considered luxurious, or if you’re planning to create luxurious products.
- Your profit margins will likely be low, so you won’t have much cash to spend. If your competitors’ pricing is already low, you might even lose money.
- You’ll need to place a strong focus on customer loyalty, and aim to improve every area of your business. This can take a lot of work.
- You may get drawn into a price war that can be costly for everyone involved.
- It only works for products that don’t need to be replaced frequently, like electronics.
- Your marketing costs may be more expensive, so you’ll need to continually measure them to ensure they’re profitable (see our article on the best digital marketing metrics to measure).
Market penetration vs product development
Market penetration is selling an existing type of product in an existing market, like a new smartphone to Australians. Product development is selling a new type of product in an existing market, like a brand new electronic gadget that nobody has created before.
As you can imagine, it takes a lot more research and development to create an entirely new product, or a product that is similar but highly innovative and can be considered “new” in its own right. You’ll need a thorough understanding of your customers’ wants and needs, and plenty of time to conceptualise, design, prototype, manufacture, test, and launch the new product. For this reason, product development is riskier than market penetration. It requires a lot more investment to get right, which naturally increases risk. But succeeding can be highly lucrative—just look at how much money Apple made from their revolutionary iPhone.
Market penetration is a growth strategy from Ansoff’s Matrix—a highly-appealing, low-risk approach for growing your business.
We hope this article has taught you the basics of market penetration, and whether it’s the right growth strategy for your company. Thanks for reading, and be sure to subscribe to our newsletter if you’d more growth tips!