What is Market Penetration?
Market Penetration is a business growth strategy in which a company executes initiatives to expand the customer base for its products and services within a certain market space. Market penetration can be both a measurement, and a projection of how successful newcomer businesses have been, or will be, against the established competition.
Knowing When Market Penetration is Appropriate
Usually performed by startups and early-stage businesses, market penetration is the first step toward business growth. Successful market penetration requires careful assessment. And perhaps the most import factor to assess is whether or not the time is right in the lifespan of the organization to attempt market penetration. Insight into that question can be gained by considering a set of related questions.
For starters, does market share appear to be increasing or decreasing? If sales are decreasing, but increasing seems possible, then market penetration may be the right course. Also, if sales appear to be flatlining compared to previous years then market penetration may be appropriate. If sales figures show a growth trend, then the time may not be right. But, if sales show a growth trend but the trend is less sharp than competitor’s sales growth trend that could mean market share is actually shrinking despite a gross increase.
In that case market penetration may be of some benefit. If there are additional customers in a business’s primary market who aren’t being reached, then marketing penetration may be in order. But if there is potential to increase sales to current customers, maybe not.
Market Penetration Planning
A solid market penetration plan begins with identifying the products or services that the research will focus on. This establishes the scope of the primary research project. Primary research data typically comes from internal archives like financial and sales reports. The next step is the market research process, which typically includes data gathering, and interpretation, as well as the compiling of competitor data with regards to pertinent products and/or services.
The secondary competitor research may be compiled from trade publications, news media, and government agencies such as the SEC and U.S. Census bureau, among other sources. With the findings from the primary and secondary research stages in hand, it becomes possible to formulate a reliable market penetration plan.
Every business has it’s own quirks and nuances, just like every market. But the five steps outlined below are a good, general guideline for estimating potential market penetration.
- Big-Picture Demographic — Begin by thinking broadly about potential customers in national census categories such as age, gender, ethnicity, and income. Try to determine where divisions and overlaps may be. If potential customers are limited to one gender or another, a certain income level, and/or ethnicity, and fall within certain generational age, say millennial generation white women who earn more than $70,000 annually, for example. From that point, you can calculate the total number of potential customers nationwide using U.S. Census data.
- Immediate Market Demographic — Geography becomes increasingly important as a brand begins to focus its market penetration plan. It may be that the new brand entering a given market has little or no interest in marketing their product on the national level. It’s also possible that the immediate market could be a statistical outlier in terms of demographics. If, for example, the local population is more ethnically homogenous than national averages, or more diverse in some respect, then it becomes important to determine a more focused target demographic. Knowing the the general area in geographic terms like radius helps to determine the gross population of potential customers. From that point the number can be adjusted downward, becoming more and more accurate, by a process of eliminating those whose sensibilities fall outside the target model.If, for example the immediate market exists within a 20 mile radius, and census data indicates that 100,000 people live within that radius, but approximately half of those are the wrong gender, then the number of potential customers is reduced to about 50,000, and so on.
- Calculating Range — Once the total size of the target market has been calculated, the number of potential customers in the national market can be added to the number of potential customers in the immediate market.
- Setting Reasonable Expectations — Dr. Marlene Jensen, and MBA professor at Lock Haven University states in her book The Everything Business Planning Book: How to Plan for Success in a New or Growing Business that it’s reasonable to expect a consumer product to achieve between 2 and 6 percent market penetration, while the reasonable range for a business product is between 20 and 40 percent. From there, the determined population numbers for the target demographic can be multiplied by the numbers at each end of the market penetration range—either 2 and 6, or 20 and 40 respectively. The resulting numbers give the estimated market penetration range. For example, if the target market was calculated at 50,000, multiply that by .02. Next, multiply 50,000 by .06. The resulting pair of numbers are the market penetration estimate, which would be a range between 1,000 and 3,000 customers.
- Projecting the Cost–Benefit — The estimated market penetration range, as compared to the number of customers required to turn a profit will be the centerpiece of a successful business plan. It’s a simple metric to calculate. If success requires converting a number of customers that is greater than the high end of the market penetration range, then the probability of success in the given market is low.
The Challenges of Market Penetration
Market penetration is supposed to be a low-risk business growth strategy typically centered around increasing marketing and sales efforts, and sometimes increasing the number of business locations in the interest of capturing greater shares of an existing customer base. Done well, market penetration yields valuable gains in market share. However, like any low-risk endeavor, market penetration has limits.
For instance, before entering a new market, businesses must devote time and resources to estimate their market penetration potential—the primary and secondary research stages previously described. And in the end, if it is determined that a new market shows the likelihood of profitable market penetration potential, a business should take it as a given that the market will eventually reach the point of saturation. The research findings may even reveal a predictable timetable for that. At that point there is no other choice but to shift focus into other area like the development of new markets.
Market Penetration in a Saturated Market
Market saturation is one of the primary limitations to market penetration. There is always a measurable, and predictable point at which all the customers with potential interest in a given category of products and/or services have been reached by either a newcomer or an existing business.
That’s the definition of a saturated market. At that point, it may still be possible to capture more market share, thereby achieving deeper market penetration, but the cost–benefit ratio tends to be unfavorable. Gaining deeper market penetration in a saturated market typically involves investment in aggressively competitive marketing and advertising initiatives intended to persuade members of a competitor’s customer base to switch loyalty from one brand to another. In those cases, there’s always a chance that the competition may respond in kind.
There is also the potential for legal issues to arise if false, or libelous claims are posited by the competitive ads. Except in very rare cases, additional customers gained through these methods in a saturated market do not yield enough return to justify the investment in time, energy, creative resources, and expense.
Market Penetration vs. Market Development
Market development is distinct from market penetration in that market development redefines the target market from the outset. In a market penetration strategy the market size is a fixed number. Market development involves expansion of the potential market to new customers or new uses, whereas market penetration involves competing to capture a greater share of an established customer base.
New users defined by market development plans may include those of similar tastes, and demographic categories who are located in a different geographic region than the primary market. Or they may be potential customers currently in the non-buyer category who need to be introduced to alternate uses for a product.
Market development may be as simple as low-cost as expanding an existing customer mailing list by buying third-party mailing lists in the interest of targeting new customer demographics. It may be a subtle pivot from the established market penetration plan in which potentially profitable demographics are targeted with new advertising initiatives. Or, it may be as in-depth as adding new locations in regions competitors have yet to target. In any of those cases, the desired market expansion involves capital investment. Obviously that’s a given, and so are the risks.
Expanding into new markets may be more complex than simply establishing new locations. If, for example, a cable TV company provides services in which fuel costs, fleet maintenance, and transit times between customers and service technicians factors into both the quality, value, and profitability of the enterprise, then expansion into new territories will involve the company either spreading itself too thin, or committing to investing in much more than just the establishment of new locations along.
Expansion of vehicle fleets, as well as maintenance facilities and staff would also be necessary in that case. And, if the new market fails to yield adequate returns, then capital and resource investments that could have been applied in other ways go to waste.
Here are a few factors to consider when contemplating a market development and positioning strategy:
- Does research indicate that the market is favorable for development?
- Can the business be adapted to the new market?
- Does the company have both the resources, and the will to commit to new market development?
- Will expansion into new markets cost the business any competitive advantages in its current market?
If the market development plan involves developing new product lines, expanding the scope of existing product lines, consider these questions:
- Will established customers benefit from the expanded product lines? Are they asking for that?
- Can shifts in manufacturing, distribution, and marketing be optimized for maximum efficiency?
- Will current assets like personnel, production facilities, distribution channels, and brand messaging resources, i.e. marketing and advertising, be sufficient to handle the expansion?
- Does the business have the expertise and skills to produce and deliver what it proposes?=
- Does the business truly understand the culture and social climate of the regions where it proposes to expand? For example, does the proposal involve building giant warehouse stores in small, quiet communities?
- Can brand recognition be leveraged in the proposed expanded market? For example, a well-known clothing company that makes foray into offering shoes, or handbags, may be able to rely on a certain amount of brand recognition.
If enough of these questions are satisfactorily affirmed and market expansion appears to offer a legitimate chance at growth and profitability, then there are a few common approaches to the process.
- Targeting the competition’s customer base — Competing agencies in any form are defined by their similarities, the most important of which is customer demographics. But market research may reveal subtle demographic subcategories that can be leveraged by using advertising and marketing resources to establish a distinction between one business organization and another. Here are a few ideas for that:
- Appearance — If your company makes a physical product you can tailor product designs to establish aesthetic distinctions that will appeal to the sensibilities of the new market segment.
- Philosophy — Brand messaging can use rhetorical devices to appeal to subtle philosophical traits that will appeal to the beliefs of the target market segment.
- Customer Experience — The customer service model can be tailored to reflect both a commitment to aesthetic and philosophical distinctions that engender a sense of exclusivity in potential customers.
- Limit Customer Risk — Design ways to onboard and service new customers in ways that are easy and convenient for them. Also offer an easy exit strategy, like a money-back guarantee
- Expertise — If the business deals in any type of technical field, brand messaging can establish technical superiority that makes choosing one brand over another a smart decision.
Using brand messaging to establish distinctions between one company and another is a tried and true market development tactic. However, once a business manages to expand its market on the merits of those differences, those distinctions must be maintained from that point forward, so long as they wish to retain primacy in the new market segments.
Admittedly, that desire may not persist forever. Competitors may initiate strategies to recapture market segments that they lost. Or, the expanded market may become less profitable over time. Or, shifts in the original market may open up new opportunities for market penetration. It could also be that the newly developed markets prove to be so lucrative that a business elects to abandon its original market altogether.
It’s also not unheard of for government regulations to change in ways that make expansion into overseas markets the most favorable strategy for growth. In that case, there will be certain elements of the model that will need to be revisited.
International Market Penetration Begins with Branding
Welcome to the big leagues where, for decades, only a small handful of the world’s largest corporations had the capacity to operate. Now that barriers to international trade have toppled, and advancements in mass communications media have enabled small and midsized businesses to compete on the international scale, it’s possible for virtually any company to expand their brand message beyond the range of their actual sales footprint.
That means building an internationally recognized brand is a legitimate possibility for an increasing number of companies. Of course, legitimacy in that sense will always be a product of diligent brand strategy.
Why Branding is so Critical in International Market Penetration
Arguably the most important element in international branding is consistency. Even more than businesses operating solely in domestic markets, those seeking to operate on the international level will live and die on their brand identity. It is absolutely vital for a company’s brand identity be aligned with the core values of the organization. And it is equally as vital for those organizational values to blend seamlessly with foreign cultures.
Logo design is essential, and if the brand identity revolves around an actual word, as opposed to a made-up name with no alternate meaning, then the word should hold consistent interpretation across all the languages native to the markets in which it seeks to operate. Because strategic branding must communicate company values and establish an emotional bond with the target customer base, it cannot be culturally offensive.
Since branding is so critical to the success of a business entering the international market, virtually any investment that is required in redesign should pay dividends. Rebranding may be a fairly common business buzzword that circulates around many offices with some frequency. But even with favorable top-down support, it’s much easier discussed than executed. In and of themselves rebranding and brand strategy processes can be surprisingly labor intensive for creative departments. Then there are certain times when executive management fails to understand the ways that brand strategies provide the first step toward optimizing benefits in new markets. Oftentimes company managers perceive branding strategies as an unnecessary expense rather than an investment because the returns can be too complex to measure, not immediately visible, and too nuanced to explain in terms the more numbers-and-figures minded find adequate.
Managerial pushback notwithstanding, the fact remains that engaging in appropriate levels of brand management opens all the initial channels for negotiating with government regulators, and potential business partnerships—such as supply chain, manufacturing, warehouse solutions, distribution, and delivery services—in foreign markets. Ultimately, adequate brand strategy is what bridges cultural gaps. Nothing in an international marketing penetration strategy could be more important than that.
Brands are distinct from the products they represent although, products are one element of brands. Brands also include a suite of abstract characteristics that visually represent the synthesis of all those elements. Some of those more abstract elements include distinguishing identity themes like user experiences, a sense of community or belonging, self-expression, and reputation. Brands become the centerpiece of a company’s identity within the community they serve, or seek to serve.
Whether executive managers realize it or not, brands are major contributors to a company’s equity. According to some economists a company with strong branding like Coca Cola, could lose all of its business assets, such as warehouses, recipes, employees, and distribution and still borrow tens of billions of dollars against the value of its brand and start all over. Good branding has a positive differential effect on the customer’s response to the products or services offered. And it is emblematic of the total value of company’s investment in its mission within the community.
Here are a few tips on what to consider in an international branding strategy.
- Brand Message— Don’t assume that what comes across as witty, charming, and adequately sentimental with original brand audience with have the same emotive impact in foreign markets. Analyze what competitors are doing in the same markets for insight.
- Appropriate Communication Channels — Radio ads may be the norm in the U.S. where the entire social structure is built around car culture and a major portion of the workforce commutes on a daily basis. But in many foreign markets where car ownership is a fraction of what it is in the U.S. many people rely on bicycles and public transportation to get around. Where that is the case brand messaging can’t rely on a captive audience occurring predictably in two-hour windows twice a day. Learning which communications media will yield the most impressions is essential.
- Understand the factors of appropriate tone— Everything about a brand contributes to the tone audiences perceive. Packaging, advertising, and company personnel each perform different versions of brand ambassadorship. And all of it reflects back on the organization as a whole. Meanwhile, the mediating agent between customers and the organization is the brand identity. The interaction between businesses, their brand, and their audience operates in a cyclical flow. If one link in the chain is breaks down, there is no interaction.
Don’t believe the cynicism of the old adage that says ‘all press is good press.’ In business, bad customer experiences resonate far longer, and with greater magnitude than good ones. Bad press is bad press. Not only do brands need to attend to brand awareness in every market where they operate, they also need to pay diligent attention to public perception. Customer’s experiences with products, and staff need to maintain a positive tone, which extends to delivery, quality control, and the manner in which services are provided.
Once branding/rebranding strategy has been established, the next step is international market penetration.
International Market Penetration Strategies
Entry into foreign markets begins with a list of decisions leading to a conclusion on cost–benefit. Some of those decisions include which markets to enter and when to enter them, at what scale, and in which manner, etc. The question of which market to enter will be determined by the long-run profit potential, which has several key factors. Some of those are the size of the target demographic, individual purchasing power, projections for job outlook, political and economic stability, and economic growth projections in the region.
The Art of Good Timing
Assuming that a new market is being considered for penetration because changes in government regulations have altered the international business climate—meaning no other foreign brands operate within that market yet—timing for entry can be determined with one simple maxim.Enter as early as is reasonably possible. Early entries have the preemptive advantage of capturing the majority of the market share so long as they have done their due diligence establishing strong brand identity beforehand.
With the market share advantage, early entry also comes with the benefit of being first to connect with and make an emotional impression on the new audience. That means by the time any market latecomers arrive, brand loyalty should be in its full effect, and those subsequent arrivals will face the uphill battle of competing against established brands for market share.
Unwritten Business Laws: Sometimes Rain Falls Even on Those Who are Already Soaked
It’s important to be aware that there’s a flip side to the early entry story. There are risks. The time and effort spent with branding strategies, market research, and local competitor analyses stand to push back to the date for achieving the full return on the initial market penetration investment. Then there is the possibility of unforeseen contingencies. Time and effort invested in learning the rules and the stakes of a new game in a new ecosystem may turn out to be greater than anticipated.
Ignorance of cultural conventions, the nuances of a foreign legal system—which may include special taxes on foreign businesses—and garden-variety xenophobic suspicion of outsiders could turn out to be liabilities that go unaccounted for in the initial market penetration plan. As previously mentioned, early entry tends to pay off for those who are fully prepared.
Consider the case of KFC who opened its first Chinese restaurant in Tiananmen Square in 1987. At the time, many of the Chinese were still wearing the tunic suits of the Mao era and had never heard of western fast food. But because of their strong brand, diligent planning and willingness to learn about the foreign culture and break from the long-established norm of selling the same line of products the exact same way they had always been sold in the U.S. and Europe, the fried-chicken giant became of the most surprising international business success stories in history. Good for them. But because of their success, the category of western fast food became a cultural novelty across the most populous country in the world. And no one fast-food chain would be enough to fill the wide open market KFC created. That set the stage for McDonald’s to spread across Chinese markets with far less effort, and investment in planning and strategy. Admittedly though, McDonald’s also had an unstoppably strong brand as well.
No business should count on the extreme good fortune McDonald’s experienced in China. As always the best bet is to hope for the best but plan for the worst. And typically when a business enters a foreign market where not even the category for its type of products or services exists, the target demographic can prove slow to adopt. In that case further investment in advertising and outreach marketing to make potential customers aware of the benefits offered may be required. And even then, it can be a painstaking process. This is where the scale of market penetration comes into play.
Scale: A Balancing Act
Entering foreign markets on the large scale is a serious commitment that requires significant resource investment to ensure success. Decisions of that magnitude have a lasting impact of the overall profitability of a brand, across all markets, and the cannot be easily reversed. If inaccurately measured and accounted for, the aftermath could render a brand vulnerable to competitor’s reactionary maneuvers in other markets. And in that tenuous period the flexibility to execute a strategic response to the changes created by the large-scale strategy could be limited or nonexistent.
Small-scale entry into foreign markets, on the other hand, may leave some flexibility and time to learn about the new environment while also limiting exposure to potential pitfalls, but it also limits the potential for market penetration and capturing worthwhile portions of market share.
Achieving International Market Penetration Through the Internet
Whether a business entity offers services or physical products the internet is probably the most important tool there is for any kind of market penetration strategy, foreign or domestic. Even for businesses that don’t operate strictly under an e-commerce model the internet is a front door that leads from every market in the world to every vendor.
Let’s continue under the reasonable assumption that any business entity that would ever engage in market penetration strategies, either at home or abroad already has a company website in their native language. Let’s also recall some of the previously mentioned points regarding market penetration and branding strategies. Under the heading of targeting a competitor’s customer base we listed as critical considerations:
- Customer Experience
- Limiting Customer Risk
And under the heading of International Branding Strategy we listed:
- Brand Message
- Appropriate Communication Channels
- Understanding the Factors of Appropriate Tone
The fastest, easiest place to execute every single one of those is on the internet. Not only that, but the easiest channel for establishing a strong brand identity that connects with new demographics in emerging markets is via internet. The internet exists wherever there are multinational businesses operating, with few exceptions. And the internet continues to grow, even into some places that never had phone lines.
Whatever the findings of any market penetration strategy, or any branding campaign, the internet, in the form of websites, mobile apps, and software packages, is going to be the most critical tool in execution. For that reason the cost of internet localization should be factored into any market penetration strategy. There are three crucial internet subcategories that should be localized to match all business strategies.
The first step in the website localization process is to translate website content. And there is no such thing as translations that are too high in quality. Of course, quality means consideration of context with respect to colloquial language as opposed to formal rules. The point is to provide the best possible user experience for the target demographic. Investing in translation management software with context-based translation tools and memory yields the best chance of completing text translation on time and within budget.
Recall the importance of avoiding messaging that might translate offensively in cultural context. After website translation, the remaining localization involves making sure all the other non-text elements are culturally appropriate for the new market. In addition to the elements above, it’s also important to consider the navigation, graphics, audio, and site architecture. Website connection speeds also vary locally, so the size of files and images and their impact on load speed should be considered.
The most important thing to keep in mind during website localization is making sure that users can use and interact with the website in a way that is natural and meaningful to them.
Mobile apps have moved beyond the stage of fads that are nice to have. Mobile app stores are global. A business app should be as well. Consider this: The number of mobile app subscribers equals approximately 95.5 percent of the global population (7 billion). More than half of those are located in Asia Pacific. And the number of subscribers in Africa and the Middle East will surpass those in Europe by 2016. These are all emerging markets that international businesses across the globe are keeping a keen eye on.
Once again, translation management systems simplify the integration of app localization directly into the development process. That means businesses can maintain focus on rapid creation and delivery of the best UX/UI features.
It comes as no surprise that software companies consider translating their product into many languages. It is surprising how many software company marketing departments underestimate the colloquial differences between countries. Even among those that share a native tongue, like the U.S. and Australia, there are significant differences. But, consider, for example a company that markets a software package, which features the number ‘4’ heavily as part of its branding strategy.
While it may be common for English speakers to use the actual numeral for in-text abbreviations for words for, four, and fore, as in the case “all-4-one.” But, in several Asian countries, the number four when spoken aloud is phonetically similar to the word for “death?” And it’s considered negative; a bad omen in the same sense as the numbers 13 or 666 in the West. A proper software localization should look and feel native, without being natively offensive. Local holidays, date formats, and time formats, should all be accounted for in the translation. It should also reflect the values and the connection that exists between the customer and the brand.
If your business is in the process of hammering out a complex market penetration strategy and would like to execute internet localization as efficiently and cost-effectively as possible, email email@example.com or call 1-866-707-6278.