Market penetration can be the biggest contributor to brand growth. Yet there are a surprising number of companies in the market with chronically low penetration levels. In many categories, a significant proportion of them never achieve a penetration rate above 5%. What does it mean? Read in the entry below.
What will you learn from the article?
In a dynamically changing business environment, market penetration is a key indicator that every business owner should know and understand. Our latest article will provide you with the necessary information on what market penetration is, how to interpret its indicators and how it can contribute to the development of your business. You will also learn how to effectively conduct a market penetration strategy to achieve success despite the competition. We have also prepared inspiring market penetration examples that you can immediately implement in your company. We invite you to read!
It is not uncommon that of the customers who have purchased a brand's products in a given year, the vast majority will not buy them in the next. Even the best brands can experience a churn rate of nearly 50%. Consequences? Companies must constantly take action that translates into increase in the market penetration rate. Even the biggest players accept that this is a long-term strategy.
Market penetration - definition
Simply put, the market penetration rate determines what percentage of the population or target group uses the company's product or service. By analyzing market saturation two perspectives should be considered. Nominal market penetration covers all registered customers or who have ever purchased a specific product or service. In turn, real market penetration relates to active consumers / users of a given product or service. Possibly, this includes those who purchased the product or used the service within a certain period of time. The market penetration rate can be calculated using the following formula:
Market penetration rate = (number of customers ÷ size of target market) x100
Determining the size of the market may be difficult depending on the nature of the product. In some cases, potential customers database it can be global in scope and generally apply to "everyone." The more detailed the demographics of an ideal audience are available, the better targeted target group, the easier it will be to make these calculations.
How to interpret the market penetration rates?
Penetration of the market with a low rate means its great potential. Depending on the situation (customer and competition analysis), the company should choose different strategies. It can develop the production capacity and capacity of the distribution network or expand the offer by reaching new customerswho so far have not been able to find the right products for themselves. Each method is generally intended to serve as sales support. So if the penetration rate is low, companies focus on increasing access to their products and attracting new customers. As the number of customers who already use products / services grows, so does the market penetration rate. Then the weight of the strategy shifts towards building loyalty and increasing revenues from one customer, according to the principle according to which 20% The company's customers are generated by 80% income.
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Market penetration and market development
For starters, brands need to realize that market penetration is a marathon, not a sprint. Based on research by Bain & Company, those brands that do all the right things can hope to increase penetration by approximately 1% per year. At this rate, it will take nearly 15 years for a brand starting with 10% penetration to reach 25% penetration. Unfortunately, few companies decide to do so creating plans and strategies in a perspective longer than the next 12 months. Moreover, many managers who are introducing a new brand will change everything from SKU types to advertising strategy rather than sticking to their course.
Companies that change everything risk losing out to rivals that stick to a plan to slowly and steadily increase penetration. Gaining the desired position in the market requires unwavering discipline and patience. As many businesses have discovered, it is easy to get sidetracked in the search for revenue to meet short-term financial goals or increase sales volume. A brand may be tempted to temporarily increase revenues by increasing prices. There is then a risk of losing buyers who simply cannot afford higher prices.
The brand can also temporarily increase sales volume by, for example, offering products only in multi-packs. However, this risks losing occasional buyers (light users) - for example, those who would buy a single product but not a six-pack. Meanwhile, such consumers are necessary in the long run for market penetration to go beyond the so-called heavy users, i.e. customers who make purchases more often. Over time, this strategy damages the brand. Companies adept in this area know they must avoid short-sighted moves to maintain a long-term and ruthless focus on market penetration.
How to carry out a market penetration strategy?
There are basically three ways to create a market penetration strategy. One of them is improvement of an existing productto increase its market share and eliminate competitors. The method seems quite simple. The company needs to improve and modernize its product in such a way that people want to use it even more. It then retains its customer base and acquires competitors' customers who decide to choose a product that better meets their needs. Let's analyze it on the example of a company that provides services and products in the field of performance management. In an effort to increase its market share and double its revenues, the company surveys its customers over the past two years to better understand why they chose its solutions. It then uses this information to improve its products and services before starting a marketing campaign. The need to improve products is due to the simple principle of reciprocity. The company needs to have successful customers because it enables the company itself to be successful.
Price reduction
Market penetration may also consist in adjusting the price of an existing product. This approach is based on lowering the price of the product in relation to the competitors' products. The aim is arousing the interest of customers. This allows the company to enter the market immediately and gradually gain a reputation as a supplier of high-quality and inexpensive products. When is the best time to use this strategy? According to experts, this will work when companies try to enter into insufficiently served markets with the product, where there is a demand, and customers are looking for opportunities. It can also work if competitors are unable to lower prices without incurring losses. After implementing this strategy, the company can gradually increase the prices of its products in order to achieve more and more profits.
Scalability
The third approach is to scale your market presence. Market penetration in this case can take place in various ways. The first is to maintain or increase market share by selling a wider range of products. To see how this works, let's look at Apple and what it does when it feels imbalanced in any of its markets. First, it starts selling more of its products in its target markets. It is expanding its product range, such as iPhones and iPads, to best meet the needs of its target group. By selling more different products to more customers in its current markets, Apple reaches customers in all market segments. Another way to gain more market share is to expand your influence into other countries' markets. Of course, this strategy applies to global companies.
Market penetration - success despite competition?
Market penetration may mean focusing on current products and current markets to increase market share. A good example of a company that has demonstrated success in market penetration is the American company Under Armor - a manufacturer of footwear, clothing and sports accessories. Competing with world-famous brands, this relatively young company, founded in 1996, constantly focused on activities that would enable it to become a leader.
This strategy required decisive and consistent actions in terms of pricing, promotion and distribution. Under Armor promoted its products through sponsorship agreements with famous athletes, teams and college sports teams. As a result, the company achieved great success - especially in relation to its main competitors, i.e. Nike and Adidas - in the fight for its share in the fitness clothing market. According to estimates, it should continue to strengthen its position brand image offering some of the most efficient, most trendy and most innovative clothing products.
Market penetration examples
Market penetration is a market development strategy that aims to increase sales by introducing products to new markets or improving current market shares. Examples of effective market penetration strategies include selecting appropriate distribution channels and intensifying marketing activities. It is worth paying attention to relationship marketing, which allows you to build lasting bonds with customers, which can significantly affect loyalty and repeat purchases. The use of these practices can help increase sales and strengthen the company's position on the market.
Market penetration - examples to be implemented
Having the right market penetration strategy – competing on price, quality and uniqueness – can determine whether your business succeeds or fails. When starting a business, a company must penetrate the market and compete with established players. Even after achieving an established position, it needs new strategies to maintain its market share. Success stories from the business world show that there are several ways to do this. Market penetration by cutting prices to attract customers is one method. Consumers lured by the promise of cheap sales usually spend more money than they planned. However, this strategy may not work in every market, so you need to know your industry. For example, 45% people buying wine prefer wines ranging from PLN 21 to PLN 30, believing that cheaper ones are of low quality.
Instead of competing with existing companies, you can penetrate the market by finding new customers. Diet Coke turned out to be Coca-Cola's success, but hers target group was overwhelmingly limited to women. The solution to this problem was the introduction of Coke Zero. The drink offers the same benefits as Diet Coke (cola flavor without calories), but is viewed as more "masculine". This opened up a completely new market for him.
If your product or service has a feature that distinguishes you from the competition, penetrating the market with this tool can be extremely effective. For example, Dove Cream bar soap sells for a higher price than your average soap bar. How it's possible? The manufacturer emphasizes that his soaps are not harsh and do not dry out the skin. These arguments speak to consumers more interested in moisturizing than just cleansing the skin.
Are you worried that penetrating the market is a futile effort, since there are only giants and "old men" around? There is a place for everyone. One way to compete with bigger players is to give your business a "personality" so that consumers perceive shopping from you as unique. Many mini-companies are masters of this strategy. Their profiles and advertisements describe how they were created and why they want to provide their customers with unique products. Each company has a unique history. You also integrate yours into the strategy public relations.