Market Penetration
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Market Penetration
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If your SaaS startup is looking for low-risk business growth strategies, creating a market penetration strategy should be one of the first things you think about. Although, before moving forward, it’s important to identify a clear definition of market penetration as it relates to SaaS and gain a better understanding of what market penetration strategy is by taking an in-depth look at some common examples.
Depending on where you look, the market penetration definition could be misleading, as there are two different meanings. As shown below, market penetration can be defined as either a measurement or an activity. In this article, we will review both market penetration definitions and how they relate to SaaS.
Market penetration defined as a measurement is the assessment of how much a product is being sold relative to the total estimated market for that product, expressed as a percentage. This is also known as market penetration rate.
If you know your total addressable market (TAM), you can calculate market penetration rate with this formula:
Establishing market size can be tricky depending on the nature of your SaaS product, as a potential customer base could be global and essentially target “everyone.” The more granular you can get with your ideal audience demographics, the easier it will be to make this calculation.
It’s suggested that average market penetration for a consumer product is 2 to 6%, while business products can range anywhere from 10 to 40%. If you can refine your SaaS product to capture 10% of the TAM in any industry – you’ll probably be doing quite well!
Take the smartphone industry for example – global leaders Apple have a market penetration rate of 19.2%, with Samsung coming in second at 18.4%, Huawei at 10.2%, and a range of smaller brands taking the remainder of the market share to its 100% completion.
The smaller smartphone companies such as Oppo and Xiaomi who are coming in around 7% have plenty of opportunity to increase their market penetration by improving their strategy around pricing, product improvement, consistency, and marketing in order to take more of the market share away from Apple and Samsung.
Market penetration defined as an activity (see the Ansoff Matrix below) is the process of going to market with a product in an existing market in which current or similar products already live, and taking market share from the other competing companies. This is also known as market penetration strategy.
The term market penetration (defined as an activity) stems from the Ansoff Matrix, developed in 1957 by Igor Ansoff, which helps companies plan their strategies for future growth. The Ansoff Matrix is a 2X2 matrix representing four different business growth strategies in which a company either enters a new or existing market, and with either new or existing products.
Market penetration strategy is one of the four business growth strategies identified in the Ansoff Matrix, the other three being market development strategy , product development strategy, and diversification strategy . Market penetration strategy refers to when the company attempts to grow using existing products in existing markets, as shown in the bottom left quadrant of the matrix graphic above.
A market penetration strategy carries a low amount of risk, and is an ideal business growth strategy for SaaS startups that are bootstrapped or unwilling to invest heavily in more risky growth strategies.
Put simply, it’s a means of planning how to grow in an already thriving market where similar products exist, and gaining market share by taking your competitors’ subscribers.
Positioning yourself in an established market is a safe bet, because it means there is a need for products in this area. However, it requires strong implementation and execution of strategies around your product positioning , pricing, user experience, and marketing in order to compete and grow alongside existing companies.
When you’re thinking about creating your market penetration strategy and increasing your market share, you’ll need to consider the different ways you can grow your company using your existing SaaS offering to make it more appealing to the customers who exist in your target market.
This can be accomplished with the following tactics:
Price adjustments and refinements tend to be the focus of market penetration strategies for SaaS companies.
As the SaaS industry grows, it becomes harder for new companies entering the market to gain market share. The market penetration rates for software products in the collaboration and CRM spaces especially (e.g. Basecamp and HubSpot) are already quite high due to the large number of SaaS products in that space.
Pricing is one of the main tactics that emerging SaaS products use to gain market share and grow their revenue when using market penetration strategy. These adjustments can be easily measured to determine their level of success.
Did market share increase or decrease when pricing went from monthly to annual? How many new customers were acquired with the announcement of a new pricing plan? Would dropping your subscription prices work to take customers away from your competitors?
Price drops works well in competitive niches where consumers are typically buying based on the cost of a product. By looking at your competitors and comparing your product and services, it can be a strategic move to adjust your pricing in order to achieve greater market penetration.
If your startup is attempting to grow through market penetration strategy, changing tactics or becoming more aggressive with your marketing campaigns can help to increase your awareness in the market. This, in turn, can woo more of your competitors’ customers into switching and signing up for your product instead.
Marketing can also help persuade your existing customers to stick with you instead of leaving for the competition. Loyalty schemes, power user features, strategic alliances , and finding unique ways to deliver value to your users can all help you keep your customers. If your users have a stellar experience with your product, they’ll be more likely to help you out with word of mouth marketing which can also drive an increase in your market share.
If you can’t beat ‘em, join ‘em. Or rather, buy them out. Acquisition as a market penetration strategy is almost as old as business itself. Buying a company in your industry means you’re essentially buying the customer base and the market share that it brings with it – or alternatively, you can buy the competition and then shut them down altogether.
If you’ve got the motivation and the budget, acquisition can be an effective tactic. If you’re in startup mode, acquisition is probably not in your ballpark just yet. In this case, you could look into strategic alliances with similar companies in order to capture their audience and widen your market by doing so.
Listening to your customers, and keeping track of what competitors’ customers are saying about their products can help you pinpoint essential features and functions that people are looking for.
A slight adjustment to your product could make all the difference in terms of your market penetration rate by giving your market something that they need and can’t find with any other company.
Acquisition is huge in the SaaS world, with industry giants regularly snapping up smaller companies in order to expand their services and capture more of the market share. Here’s a list of the top 10 company acquisitions that happened over the last year.
Diet Coke was a huge hit when it was released, but it attracted primarily female consumers. Men were avoiding it because it felt like more of a feminine drink.
Coca-Cola’s solution? “Bloke Coke”, or rather Coke Zero, which is essentially the same in terms of taste and benefits but squarely positioned and marketed to capture the male market share they were missing with Diet Coke.
Android is well known for its penetration pricing strategy . By offering its phones at a low entry price, it can aggressively lure consumers from Apple who have the main market share in the smartphone market.
Market penetration strategy involves focusing on selling more of your SaaS product into your existing market in order to acquire a higher market share and gain more of your competitors’ customers.
With strategic planning around pricing, competitors, increasing your promotional efforts, and making any necessary changes to your product, it should be possible to increase your market share and slowly gain dominance in your market.
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(number of customers ÷ target market size)
Market Penetration
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Market Penetration : Techniques, Advantages and Disadvantages
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As soon as a company enters a new market, it strives for market penetration . The main objective behind the market penetration strategy is to launch a product , enter the market as swiftly as possible and finally, capture a sizeable market share. Market penetration is also, sometimes used as a measure to know whether a product is doing well in the market or not.
The technique of Market Penetration usually does not affect the overall marketing strategy of a company, but invariably brings a solid growth potential and an increase in revenue generation. A company trying to adopt the concepts of market penetration must remember to also implement specific plans and tactics to challenge the competitors and boost sales figures. However, it must also be considered that market penetration can be a risky affair and has some disadvantages also.
More commonly, this technique is useful whenever a business is selling prevailing products in an ongoing market . Marketers must take into consideration the relevant market development or expansion grid data to decide actually, which penetration tactic to adopt? In other words, the market may be saturated or it may be in an intense competition scenario or the products may have low turnaround time. Now, what should be the best tactic for all of these different scenarios? Well, the answer to this question lies in the type of market penetration strategy you adopt. And yes, there are quite a few different penetration tactics to choose from. So without further ado, let’s know about a few of them.
Following are the different market penetration tactics:
The strategy of Price Adjustment is one of the most widely used market penetration tactics. A market penetration example could be lowering the price of a product or service with the aim of increasing sales is a price adjustment tactic. Furthermore, the alteration (increase or decrease) in the price of a product after analyzing the competitors’ products is also a scenario of price adjustment. But, in the real sense, this marketing strategy should be used very judiciously as overdoing it can lead to adverse results. Like, increasing your price consistently may make the customers believe that you are a company of high-profit motive. Decreasing the price too often would make them to believe that your products are of sub-standard quality.
The drastic increase in promotion of a product (or service) can lead to dramatic results. For example, advertising can be a wonderful tool for increasing brand awareness. Companies do have a choice of making their campaigns long-term or short-term which depends upon their needs and budget. However, the thing to be considered is that whatever be the size of the campaign, it must be well-planned and thought-out. An easy to counter promotional campaign would be simply ruined by competitors in this age of cut-throat competition.
The strategy of Distribution Channels is one of the most constructive market penetration strategies. This strategy typically involves opening of new distribution channels by focusing on a particular distribution channel. For example, if selling through retail outlets is your primary channel, then you can learn to gain new channels like telemarketing , e-mail marketing, online marketing , etc. Such opening of new distribution channels pave the way for more new channels and thus lead to increased market space and overall profitability.
It is true that to really appeal to your customers, you must improve your product quality . However, sometimes by communicating to them about the better standard of the product itself can do the trick and no major improvement in the product may be needed. This is because most consumers are encouraged to buy a product just by its appeal and do not necessarily check whether it proves itself or not. Thus, only by doing slight adjustments with the product and it’s packaging you can appeal more strongly and increase your sales revenue .
A very potent method of market penetration is that of increased usage of any product or service. If a marketing promotion campaign is effectively delivered at a specific area, then it would lead to an upsurge in product use which would thus lead to better market penetration with the increase in sales figures.
Most marketers whenever think of growth, think of new launches. However, it is only partially true. Actually, it can be risky too. When a new product is being launched, there exists the risk of it being successful or not. But, an efficient distribution channel along with a smooth delivery process makes it sure that the product does meet the expectations. Similarly, entering a brand new segment of the market can be risky as well. Therefore, it is absolutely essential to know your market and your product in order to do well and beyond expectations. An effective way to do this is to properly communicate with the customers and be sensitive to their requirements and wants.
When it comes to adopting strategic options, it is crucial to leverage your business’s strengths in a correct and just manner. For example, by minimizing your variable costs, you can boost your sales and establish a barrier to entry for others. This is why many firms with superior technology and distinct processes are able to reduce variable costs and earn better gross margins per item sold. With a substantial share in the market and an efficient marketing process, your business could create a barrier to entry to prevent competitors from coming into your industry.
Although, the entire process of market penetration seems simple and monotonous, yet it’s a big challenge if you perceive it to be. To overcome the challenge, you need to be more unique and highly innovative in your approach. A repetitive selling strategy would yield unsatisfactory results and hinder your growth potential. So, it would be better to think different and modify your penetration tactics as and when required. By being more innovative and adding value to your products you enhance your success chances.
Some actions you could consider to be unique are:
The product penetration tactic of diversification entails manufacturing new products for new markets. The strategy of diversification is usually followed whenever, there is saturation in the current market or when environmental changes such as societal, economic , technological or regulatory make it very hard to generate new sales in those markets. This strategy is most commonly followed by those businesses in the health sector, such as hospitals. Hospitals have now diversified their services in the form of long-term care facilities, reimbursement, network referrals, and utilization. Those firms that have diversified on opportunities of their strengths have been able to gain the most.
For some organizations, it is difficult due to one or more reasons to enter new markets. To solve such an issue, many of these organizations enter into a kind of strategic alliances with one another to operate in a particular market. Although strategic alliances can be formed into many forms, the more common one is the joint venture business, in which each partner business holds an equity position. The most common and natural strategic alliances are found in the pharmaceutical industry.
The Market penetration strategies make benefit of reduced prices to upsurge product demand and increase your market share. As the demand for your product increases, your business saves money on product manufacturing costs due to the larger volume of produce. Market penetration strategy isn’t going to work for all products and all types of businesses. So, some companies utilize different marketing strategies than the normal to be more effective.
Here are some advantages of practicing market penetration strategies
If the aim of your business and marketing activities is to expand your customer base, then market penetration is the exact remedy you need. When you propose lower prices than your rivals, tempting their customers becomes possible and you receive what you expected. Thus, fast growth is heavily dependent upon lower prices. The more rational these are the better will be your chances.
Certainly, it’s reasonable to say that penetration leads to cost-efficiency. Market penetration can lead to cost advantages if your business processes go in the manner as you anticipated. By keeping low prices, you ensure that customers stay with you and it also means that you can order more quantity of products from your suppliers that eventually results in higher profit figures. This is why certain companies take the risky route and first buy products in bulk due to discounted prices and then they implement penetration strategy.
One of the more challenging segments of the market penetration strategy is to combat with your rivals. Just try to imagine, you have plentiful competitors who are desperately trying to evolve and slow you down and are stealing your customers which results in lowered profits for you. Now following the rule of survival, your only way out is to fight and defeat them to stay at the top. For example, low initial prices will force your competitors to move to alternative strategies with changed market penetration pricing regulations. By this way, you will appeal to the lost consumers and it will render competitors on the defensive or leaving the market altogether.
Now, let’s look at some of the disadvantages of market penetration strategies:-
Lowering the product price as you will is not always possible. Sometimes, products are costly to manufacture and tiny businesses find it difficult to survive while producing sufficiently to lower the production and price. This becomes more complicated when you have to deal with competing firms. Under such circumstances, it’s best to focus on the marketing campaign, product packaging and enhancing public image because these have the same potential having a low price structure has.
Some firms who produce luxury products commit the silly mistake of marketing it as an inexpensive item. Hence, customers who adore luxury products would avoid it being marketed as an “inexpensive item.” Thus, if you’re concentrated on making luxury products, then do consider that low prices may make your sales thinner and the product might even fail in the market.
When your company has numerous product lines that also include a luxury line then, adopting a market penetration strategy would certainly be adverse. For example, if you apply a particular market penetration strategy on a single product, it might badly reflect on the remaining of the product lines. Therefore, if a big number of customers get familiar with your cheap product, it’s highly likely that they would forget that you also produce luxury items and your brand’s status as a luxury manufacturer will disappear.
Market penetration strategy isn’t going to work at a place where prices are previously set low. For example, when prices are previously low, the consumers have by now built trust on an existing company, and thus entering that market and attempting to beat the competitor would be a highly ineffective manner of action. Rather, a new company should focus on gaining its worth in the business, by trying to create low prices of products.
In the given article, we’ve tried to showcase several market penetration strategies. However, such tactics will be applicable best when you make use of multiple ones together. The increase in reach of your product should be accompanied by a subsequent increase in your promotions. After increasing the promotion, you are bound to grow the product usage and on the other hand, attract competition from your rivals.
This has been a guide to Market Penetration. Here we have discussed the Top 10 Successful Strategies for Market Penetration, You can also go through our other suggested articles to learn more –
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