Market penetration


Market penetration refers to the successful selling of a good or service in a specific market. It involves using tactics that increase the growth of an existing product in an existing 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 setup. It helps establish the business's 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 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 show opportunity for the business, which 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, in that customers often need to be re-introduced to a company or reminded why they need a company's goods/services. With 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, supply chain problems, and economies of scale.
Market penetration, market development, and product development together establish market growth for a company. Overall the major growth opportunities they implement attempt to peak sales through stressing current products in present markets and present products in new markets. This includes developing new products for existing markets, subsequently. It is about finding new ways to boost sales and keep customers loyal and increase market share. When implementing change, companies must be careful not to compromise their existing revenue or customers. If the packaging or visual aspects of a company are altered drastically, existing customers may not recognise a brand and opt for a competitor's product or service. Too much alteration can make consumers wary, so change must be implemented in a subtle manner so as to only increase market share and build on profits. Managers and leaders should monitor this throughout the entire process to ensure smooth changes. Clear planning will also help minimise this risk and will lead to improvements and a boost in market share.
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 competitor's company to expand market share.
For a business to come up with a decision using the grid, key personnel must consider numerous factors such as market penetration, product development, market development, and diversification, which measure brand popularity, defined as the number of people who buy a specific brand or a category of goods at least once in a given period, divided by the size of the relevant market population. Market penetration is one of the four growth strategies of the Product-Market Growth Matrix as defined by Ansoff. Market penetration occurs when a company penetrates a market in which current or similar products already exist. A way to achieve this is by gaining competitors' customers. Other ways include attracting non-users of a product or convincing current clients to use more of a product/service. Ansoff developed the Product-Market Growth Matrix to help firms recognize if there is any advantage to entering a market. The other three growth strategies in the Product-Market Growth Matrix are:
Market penetration refers to the successful selling of a product or service in a specific market, and it is a measure of the amount of sales volume of an existing good or service compared to the total target market for that product or service. Market penetration involves targeting on selling existing goods or services in the targeted markets to increase a better market share/value. It can be achieved in four different ways, including growing the market share of current goods or services; obtaining dominance of existing markets; reforming a mature market by monopolising the market and driving out competitors; or increasing consumptions by existing customers.
Another alternative to calculating market penetration is if the dividend growth rate is more than the ratio of the percentage population of wealth distribution ratio then market penetration is possible.
Market penetration is a way to determine the success of the business model and marketing strategy for a product. To check the success, one must have a way to gauge the amount of the targeted market and how many 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.
  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.
  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 in order to 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 is a tool for understanding the potential earnings of a business and is integral to calculating a resourceful business model.

In an emerging market

A model was theorized for market penetration by Yan Dong, Martin Dresner and Chaodong Han.
This is meant for emerging markets but the connection extends across to more established markets as well. The model illustrates that market penetration and understanding of the number of people that will be reached with a product is indicative to how much stock must be ordered and both that and market penetration are of utmost importance for financial performance. However, emerging markets are difficult to predict as they are categorized by large amounts of growth. This means demand is hard to forecast and therefore inventory supply as well.
The connection between emerging market penetration and inventory supply are bridged by several factors such as advanced inventory management, technologies and holding costs. So while the market penetration may dictate how much supply is needed other factors must dictate how much inventory it is prudent to keep. Understanding market penetration for an emerging market is more difficult due to the lack of established competitors and similar products.
Emerging markets are susceptible to large companies and are sought after by globalized businesses due to the increase in disposable income the average person will have and weak local competitors. The weakness of local competitors is due to their poor customer service and limit in resources as they don't have the capital and reach that large corporations have. The four big emerging markets are Brazil, Russia, India and China as they were the fastest to recover after the 2008/2009 economic crisis. These markets are untapped potential for revenue and a good spot for globalization for dominant company's. Large market penetration is the key to fully tapping these markets.