Building a Successful Market Penetration Strategy in Three Steps
Market penetration strategies can be defined as an effort of increasing market share for current products or services of the firm by marketing activities. In fact, market penetration has never been an affordable strategy that might burn the company budget in a short time. Hence, having a stand-out market penetration strategy would save money and get better market power.
The significant attribute of market penetration is that it should be combined with some other tactics, including Sale promotion and Public Relation (PR):
- Sale promotion consists of direct sale effort engaging in instant purchasing activities by offering value-added products or services.
- PR refers to a set of activities for building sustainable relationships with target customers, investors, public media providers in the target market.
So, when will companies execute market penetration strategy?
- Case 1: current products or services have no room for growth in the current market, especially in the IT industry, where the production capacity of companies excesses the demand in the current market. For instance, in India or some other Asia countries, software outsourcing services are currently vibrant and prospective. Unfortunately, with a rising number of providers, local demand cannot feed the hungry hunter. IT outsourcing companies need to attract clients from other countries, especially Europe and the US.
- Case 2: market share of main competitors is falling with market demand remains. Five years ago, HTC, a Taiwanese smartphone producer, took a high position in the market, which threatened many competitors. Unfortunately, in 2018, HTC lost its leading market share to 0.3%, while demand for smartphones steadily increased. In that situation, Apple and Samsung enjoyed the opportunity to capture HTC’s market share by successfully executing series of penetration strategies.
- Case 3: the company enjoys an economy of scale, leading to a strategic competitive advantage compared with a competitor. Foxconn, the largest producer of Apple, refers to a typical example of economy of scale. With high production capacity, Foxconn could lower production costs than competitors.
When deciding to execute a market penetration strategy, I will show step-by-step strategy building.
Key 1: Start with report and research
Obviously, you cannot write a strategy based on your desire. It needs to start with market research in consideration of internal company powers. In this case, carefully considers five indicators:
1. The minimum efficient scale of market penetration plan
At minimum efficient scale, companies have succeeded in optimizing capacity and cost. Basically, economies of scale would lower the cost of production. However, if companies produce at a volume that excessed the minimum efficient scale, the production cost would be increased again. This indicator is more crucial for those companies leveraging price competition.
2. Market relevance
Obviously, companies suffer less challenge with penetrating a market, which is highly identical to the current market. Evidently, costs of market research, market analyst, and testing could be saved. However, low risk means low profit. The high market relevance would reduce the room for expansion due to less innovative activities.
3. Supportive assets
Considering the current resource and assets refer to be fundamental before making any strategic decision. In which marketing channels and distribution channels should be taking into consideration. They are a long-term and valuable resource that companies can take advantage of them for rapid executing strategies.
4. Market life cycle
You might hear about the product life cycle, illustrating the sale of a regular product would steadily rise before reach a peak then starts falling. The concept of the market life cycle shows some similarities. In the young market, newcomers face fewer competitors and more room for sale. However, the purchasing capacity is also low as well. By contrast, a mature market would promise a high market demand and obviously highly competitive among players.
5. Innovative technology level
With companies owning exclusive breakthrough technology penetrate in highly innovative technology market would make sense. On the other hand, creative companies would find struggling in the highly technical market, which the expertise background is highly appreciated.
Key 2: Risk calculation
When it comes to market penetration, risks and profits should be taken into consideration.
- Force majeure risk
- Uncommon government intervention or regulation change
- Natural disasters
- Financial issues from strategic vendors
2. Predictably objective risks
- Market risks: material availability, pricing fluctuation, vendor faith
- Inflation, taxing, exchange rate
- Environmental impacts
3. Controllably subjective risks
- Unstable cash flow
- Payment capacity
- Budget overturn due to management issues or failure in budget planning
4. Legal risks
- Copy right violation
- Language barriers in contracting
- Contract fraud
- Lawsuit or litigation
Key 3: Tactic selection
Before comprehensively considering all the above elements, it’s time to decides the suitable strategies. In fact, you can find multiple documents and stories regarding market penetration strategies with several used tactics. But in my articles, I only mention three of them that I believed as backbones to other practices.
1. Waterfall market penetration strategy
The waterfall strategy suggests companies should enter the market by order. Only after your success in the first market, you would process the next step in the second market, leveraging accumulated resources and experiences to increase the power in the second market. In other words, you take the tactic one by one as a waterfall.
This strategy is studied to be suitable for companies with a long product life cycle entering the young market. In practice, executing the waterfall market strategy indicates lower risks for companies, which help extend the product life by selling less attractive products in the primary market in another market.
Unfortunately, with a highly competitive market, waterfall might come up with failure when competitors could handily copy the model and market share.
The waterfall strategy can be executed by:
- Direct export
- Joint ventures
- M&A
2. Wave market penetration strategy
With wave market penetration, companies would enter a group of markets at the same time. Markets in the same groups need to indicate several identical attributes, indication technology level, culture identity, customer power, and more. After dominating the first group, companies would come with the following market group.
Basically, using this strategy, companies could keep the risk low in exchange for immense market research efforts. In practice, there are few identical markets to be grouped. The failure in grouping could lead to loss or bankrupt.
The wave strategy can be executed by:
- Indirect export through intermediaries
- Online distribution channels
- Strategic alliances
3. Multimarket Strategy
Companies using this strategy might accept the risk of capturing several markets simultaneously, which is suitable for corporate with strong financial capacity. Accordingly, the only company with a short product life cycle should accept it since they should standardize production processes and business models. Besides, they cannot copy 100% of activities in a market to another that requires proper adjustment.
The multimarket strategy can be executed by:
- Direct or indirect exporting
- Franchising and licensing
- Online selling
