Market penetration strategy

Market penetration strategy refers to the successful selling of a product or service in a specific market. It is measured by the amount of sales volume of an existing good or service compared to the total target market for that product or service. Market penetration is the key for a business growth strategy stemming from the Ansoff Matrix. H. Igor Ansoff first devised and published the Ansoff Matrix in the Harvard Business Review in 1957, within an article titled “Strategies for Diversification”. The grid/matrix is utilized across businesses to help evaluate and determine the next stages the company must take in order to grow, and the risks associated with the chosen strategy. With numerous options available, this matrix helps narrow down the best fit for an organization.

This strategy involves selling current products or services to the existing market in order to obtain a higher market share. This could involve persuading current customers to buy more and new customers to start buying or even converting customers from their competitors. This could be implemented using methods such as competitive pricing, increasing marketing communications, or utilizing reward systems such as loyalty points/discounts. New strategies involve utilizing pathways and finding new ways to improve profits and increase sales and productivity in order to stay competitive.

Definition

Market penetration refers to ways or strategies that are proposed or adopted so as to be able to create a niche in the already existing market. Although it can be performed throughout the business’s life, it can be especially helpful in the primary stages of set up. It helps establish the businesses current station and which direction it needs to expand in to achieve market growth. Successful outcomes stem from careful monitoring by key staff and leaders. Timing is key to a successful market growth; this can be dependent on the overall market welfare, the business’s competitors and current events. Questions, brainstorming and discussions can help distinguish whether it is the best time for market growth. These can include questions surrounding market share increases or decreases. Sales can be declining but shows opportunity for the business, it could be the perfect time to make alterations so as to grow market share. Market penetration can also be helpful when sales are proving to slow down, customers often need to be re-introduced to a company or reminded why they need a company’s goods/services. With the consumers attention span becoming less and less, organizations need to constantly keep on top of competitors to stay relevant.

Some factors of market penetration are holding costs, advanced inventory management practices and technology (e.g. ongoing replenishment and vendor managed inventory), supply chain problems and economies of scale (e.g., Chang and Lee 1995, Chen et al. 2005, Gaur and Kesavan 2005, Gaur et al. 2005, Hendricks and Singhal 2005, Huson and Nanda 1995, Lieberman et al. 1996).

A few different options for market penetration are:

  • Developing a new marketing strategy to entice more customers to purchase or continue purchasing.
  • Become price competitive as a swaying factor for customers to choose a product or service over another company.
  • Use special promotions or offers to grab attention.
  • Utilise the Boston Matrix to decipher which product or service benefits further investment and time and which can be disregarded.
  • Purchase a competitors company (in mature markets) to expand market share.

Market penetration is a way to determine successfulness of the business model and marketing strategy for a product. To check the successfulness, one must have a way to gauge the amount of the targeted market and how much potential localized or otherwise customers there are that would be susceptible to a product. To this end Charles Hill came up with a five step system to understanding advertising’s influence on the market.[6]

  1. Identify the demographic most suited to a product. Even though other demographics may use a product it is about identifying the largest demographic so that the majority of advertising is tailored to them. (e.g. candy for children, salad for adult woman who may be dieting)
  2. Decide upon the area in which they live. Location is important and wholly depends on the reach of a brand. If a company operates at a national level, then the entirety of the country will have to be averaged to reach the largest number of people. The smaller the area, the more specific one can be about the people of each demographic within it.
  3. Knowing the size of the market is integral to understanding market penetration.
  4. Understanding competitors market penetration. What benchmark should one go for? Based on the penetration that other products have reached, calculate the number that should be reached in the demographic by multiplying the total number of the demographic by whatever the percentage that other products are reaching.
  5. Calculate the number of customers that a business needs to sell to too earn a profit and then compare that to the number other competitors are reaching; if the business does not make a profit with average market penetration, it’s time to rethink the business strategy.

Market penetration strategies

Price adjustments

One of the common market penetration strategies is to lower the products’ prices. Businesses aim to generate more sales volume by increasing the number of products purchased by putting on lower prices (price competition) for consumers comparing to the alternative goods. Companies may alternatively pursue strategies of higher prices depending on the demand elasticity of the product, in the hope that it will generate an increased sales volume and result in higher market penetration.[12]

Penetration pricing

Penetration pricing is a marketing technique which is used to gain market share by selling a new product for a price that is significantly lower than its competitors. The company begins to raise the price of the product once it has achieved a large customer base and market share. Penetration pricing is frequently used by network provider and cable or satellite services companies. Many of the providers will initially offer an unbeatable price to attract customers into switching to their service and after the discount period has ended, the price increases dramatically and some customers will be forced to stay with the provider because of contract issues.[13]

Penetration pricing benefits from the influence of word-of-mouth advertising, allowing customers to spread the words of how affordable the products are prior to business increasing the prices. It will also discourage and disadvantage competitors who are not willing to undersell and losing sales to others. However, businesses have to ensure they have enough capital to stay in surplus before the price is raised up again.

Increased promotion

Businesses can also increase their market penetration by offering promotions to customers. A promotion is a strategy often linked with pricing, used to raise awareness of the brand and generate profit to maximise their market share.[14]

More distribution channels

A distribution channel is the connection between businesses and intermediaries before a good or service is purchased by the consumers. Distribution can also contribute to sales volumes for businesses. It can increase consumer awareness, change the strategies of competitors and alter the consumer’s perception of the product and the brand, and is another method to increase market penetration.[12]

Product improvements

Product management is crucial to a high market penetration in the targeted market and by improving the quality of products, businesses are able to attract and out-quality the competitors’ products to match customers’ requirements and eventually lead to more sales made. Product improvements can be utilised to create new interests in a declining product, for example by changing the design of the packaging or material/ingredients.

Market development

Market development aims at non-buying shoppers in targeted markets and new customers in order to maximise the potential market. Before developing a new market, companies should consider all the risks associated with the decision including its profitability.[15] If a company is confident about their products, believes in their strengths, and is enticing to new consumers, then market development is a suitable strategy for the business.

References

  1. Jump up to:a b Higuera, Valencia. “How to develop market penetration”. Chron.com. Retrieved 2016-08-29.
  2. Jump up to:a b Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN 0137058292. The definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics are part of the Marketing Accountability Standards Board (MASB) ongoing Common Language in Marketing Project.
  3. ^ “Market Penetration Strategy: Everything You Need to Know”. Inevitable Steps. June 6, 2015. Retrieved January 31, 2016.
  4. ^ Arkolakis, C. (2010). Market penetration costs and the new consumers margin in international trade. Journal of Political Economy, 118(6), 1151–1199. Retrieved from http://www.nber.org/papers/w14214.pdf
  5. Jump up to:a b c Free Management Ebooks. (2013). Ansoff Matrix: Strategy skills. Retrieved from http://www.free-management-ebooks.com/dldebk-pdf/fme-ansoff-matrix.pdf
  6. ^ Nordmeyer, B. “How to Estimate Market Penetration”Smallbusiness.chron. Retrieved 1 April 2016.
  7. ^ Han, C., Dong, Y., & Dresner, M (2013). “Emerging Market Penetration, Inventory Supply, and Financial Performance”. Production and Operations Management22 (2): 336. doi:10.1111/j.1937-5956.2011.01311.x.
  8. ^ Johansson, J. K. (2011). “The rate of penetration by multinationals into emerging markets”. Multinational Business Reviewdoi:10.1108/15253831111172694.
  9. ^ Kwortnik, R. (2010). International encyclopedia of hospitality management. London, United Kingdom: Routledge. ISBN 9781856177146.
  10. ^ Schroder, H. (2015). Integrated sales and marketing management: Successful integration of marketing and sales after mergers & acquisitions. Hamburg, Germany: Anchor Academic Publishing. p. 10.
  11. ^ Farris, P.W., Bendle, N.T., Pfeifer, P.E., & Reibstein, D.J. (2006). Marketing metrics: 50+ Metrics every executive should master. Philadelphia, Pennsylvania: Wharton Press.
  12. Jump up to:a b Joseph, C. (n.d.). Examples of penetration strategies. Retrieved from March 20, 2016, from http://smallbusiness.chron.com/examples-penetration-strategies-11699.html
  13. ^ Applebaum, W. (1966). Methods for determining store trade areas, market penetration, and potential sales. Journal of Marketing Research3(2), 127–141. doi:10.2307/3150201
  14. ^ McGrath, M.E. (2001). Product strategy for high technology companies (2nd ed.). New York, NY: McGraw-Hill
  15. ^ QuickMBA. (n.d.). Market share. Retrieved March 20, 2016, from http://www.quickmba.com/marketing/market-share/

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