Market penetration as a factor in brand development

Market penetration may be the biggest contributor to brand growth. Even so, there are a surprisingly large number of companies with a chronically low penetration rate. In many categories, a significant proportion of them never achieve penetration rates above 5%. What does it mean? Read in the post below. 

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% customers the company generates 80% income.

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 for increasing penetration about 1% per year. At this rate, it takes nearly 15 years for a brand to start with 10% penetration to achieve 25% penetration. Unfortunately, few companies choose to 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 who stick to the slow and constantly increasing penetration. Achieving the desired market position requires unwavering discipline and patience. As many companies have discovered, it's easy to stray off course in search of income to meet short-term financial goals or increase your sales volume. A brand may be tempted to temporarily increase revenues by increasing prices. There is then the risk of losing buyers who simply cannot afford higher prices. 

The brand may also temporarily increase the sales volume, e.g. by offering products only in multi-packs. This, however, risks losing casual 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, such a strategy hurts the brand. Companies skilled in this area know they have to avoid short-sighted movesto maintain a long-term and absolute 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 based on scaling your market presence. In this case, market penetration can take place in various ways. The first is to maintain or increase your market share by selling a wider range of products. To see how this works, let's take a look at Apple and what it does when it experiences an imbalance in any of its markets. First, it starts sell more of your products in target markets. It is expanding its range of products, such as iPhones and iPads, to best meet the needs of the target audience. By selling more different products to more customers in today's markets, Apple reaches out to customers in all market segments. Another way to gain more market share is to expand your influence to other countries' markets. Of course, this strategy applies to companies with a global reach. 

Market penetration - success despite competition? 

Market penetration can mean focusing on current products and current markets to increase market share. A good example of a company that has proved successful in penetrating the market is the American company Under Armor - a manufacturer of footwear, clothing and sports accessories. Competing with world-renowned brands, this relatively young company, founded in 1996, has consistently focused on activities that would enable it to gaining a leadership position. This strategy required decisive and consistent actions in terms of pricing, promotion and distribution. Under Armor promoted its products through sponsorship deals with well-known athletes, teams and academic sports teams. As a result, the company has been very successful - especially against its main competitors Nike and Adidas - in the fight for its share of the fitness apparel market. According to estimates for 2021, Under Armor should continue to strengthen its own brand image offering some of the most efficient, most trendy and most innovative clothing products.

Market penetration - examples to be implemented

Having the right market penetration strategy - competing on price, quality and uniqueness - can determine whether your business will succeed or fail. When starting a business, a company must penetrate the market and compete with recognized players. Even after gaining an established position, it needs new strategies to maintain its market share. Business success stories show that this can be done in several ways. Penetrating the market to cut prices to attract customers is one method. When lured by the promise of cheap sales, consumers tend to spend more money than planned. However, this strategy may not work in every market, so you need to know your industry. For example, the 45% of wine buyers prefer wines ranging from PLN 21 to PLN 30, believing that the 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.