Market penetration: 6 strategies for small businesses

Market penetration indicates how well your product is performing in the sea of other products out there that are just like it. But why is this important? Understanding your success as a small business owner comes with understanding your market penetration and how well your product is valued and, in turn, how often it’s purchased by your customers. 

But recognizing market penetration is only the start—you’ll also need to learn and implement the correct strategies to improve your market penetration. This includes pricing, updates and improvements, and growth strategies in the market. 

• What is market penetration?
• Understanding market penetration
• Market penetration formula
• The Ansoff matrix
• What is a good market penetration rate?
• Market penetration strategies
• 1. Adjust pricing
• 2. Product improvements
• 3. Pursue partnerships
• 4. Grow your territory
• 5. Create a new marketing strategy
• 6. Offer a customer loyalty program
• Market penetration example
• Considerations for your market penetration plan

What is market penetration?

Market penetration is a calculation comparing the volume your product is purchased by buyers in the market versus competitors in a defined time period — it’s typically presented in a percentage or fraction format. Market shares are evaluated over a defined period of time, typically by fiscal quarter or year(s).

For example, let's say a shoe company like Nike is looking at its high market penetration. This percentage would be a comparison of how much market share they hold in relation to all the other similar products in the market. 

Understanding market penetration

Let’s look at another example. If you were comparing the market share of cell phone providers and wanted to know the market penetration rate of your company over the course of a year, here’s what you’d need to know:

• The sales volume of products over a year
• The sales volume of all other competitors and similar products over the same year

Next, you would use the market penetration formula to find the percentage of market penetration you currently hold.

Market penetration formula

The market penetration formula takes the two factors from above and divides them:

• Market penetration = (Sales volume for  product X ÷ total sales volume of all competitors and similar products) x 100

The Ansoff matrix

The Ansoff matrix, developed by Igor Ansoff, considers market penetration along with other factors, including:

• Product development
• Market development
• Diversification

The matrix uses the four strategies together to determine the risks associated with business growth. The outcome can be seen in the image below.

The goal of a market penetration analysis and strategy is to increase sales from the existing market through the use of set strategies like promotion, price alteration, and competitor acquisition We’ll explore all of these strategies later in this article.

What is a good market penetration rate?

So what does a decent market penetration rate look like, especially to small businesses? Well, as a business owner, you should always aim to grow your market penetration and try to capture the biggest piece of the market-share pie. Do this by:

1. Tracking your market penetration quarter over quarter
2. Comparing to direct competition of similar business size

As long as you’re growing quarter over quarter and outdoing your competition, you should consider your market penetration successful.

Market penetration strategies

As a small business owner, you understand that nothing was ever done or maintained on accident—there was a strategy in place to make results happen. Market penetration falls in this category. Creating and implementing a market penetration strategy looks like this:

1. Being intentional with your plan
2. Knowing what you want your outcome to be
3. Planning for the unexpected 

Let’s explore the best strategies to see results in your market penetration, starting with adjusting your pricing.

1. Adjust pricing

The first market penetration strategy is to adjust your pricing based on:

• The value of your product
• The competitors’ pricing
• The expectations of your target customer

If your pricing is too high, you may be losing market share due to existing customers being able to buy the same product elsewhere. In this case, you could consider lowering your prices. However, if you’re adding additional value through product improvements, you may be able to justify the price increase and charge more than competitors. It’s a fine line, but one metric worth diving into.

2. Product improvements

Product improvements should also be on your list of strategies to try to increase your market penetration. With product improvements—especially ones that are unique and not being done by the competition—you have a rare advantage in increasing your market share. To do this, think about:

• The needs of your customer
• The problems your product could potentially solve
• The accessories or updates your product could have
• New products to unveil

3. Pursue partnerships

Partnerships are also a common strategy used by small business owners to make a splash amongst their competitors. This could mean:

• Partnering with other companies in your industry
• Partnering with influencers to reach a wider audience
• Partnering with other people to bring in new ideas

4. Grow your territory

Territory growth to a new market requires growing your physical or digital presence through expansion. This can be done by opening a new storefront in another town or by opting for another distribution channel by creating an online store. The benefits of growing your territory include:

• Reaching a wider audience
• Expanding your brand 
• Possibly creating a chain that can later be franchised

5. Create a new marketing strategy

Sometimes it’s not the product market or the location, but rather, the message that’s causing a loss in market penetration. This refers to your marketing strategy as a whole. Your marketing strategy holds your brand message and is likely the first thing your customer will see before even trying your product, so you need to come in strong and purposeful on your first try or risk losing potential customers. Here are some tips:

• Hire a marketing consultant to revamp your current marketing campaigns
• Update your branding colors, website, and slogan 
• Make your message clear and concise by removing the “fluff”

6. Offer a customer loyalty program

Customers love to feel exclusive, special, and valued. One way to achieve this is through a customer loyalty program. This way, you can reward your loyal customer base and encourage them to spread the word, creating more loyal customers. Some ideas include:

• Creating a special discount for loyalty subscribers
• Hosting a special event only for a limited number of customers in the program
• Creating a high-value incentive for sharing your brand on their social media

Market penetration example

Let’s go back to our example of your company and put some numbers into play for better visualization. Let’s say:

• Total product market size = $409 million
• Total market size of your business = $192 million

Your company’s market penetration = (192 ÷ 409) x 100 = 46.9%

With nearly 47% market penetration, your company is showing exceptionally favorable outcomes of how much market share they are capturing. Now, as a retail giant in the space, it makes sense for them to be a market leader. It would be common for a small business or startup, on the other hand, to only have a small chunk of the pie with a  10% or less  market penetration. However, the point remains the same: Higher penetration is always better for business.

Considerations for your market penetration plan

Creating a plan is all about historical data and strategy implementation. For example, looking back at your previous records can give you a good indication of where to start depending on where you saw growth or a decrease in revenue. 

1. Look at your records to determine a good starting point.
2. Take your information and decide which strategy would be best to implement first.
3. Use the six penetration strategies mentioned above, one after another, to see gradual growth in your total market penetration.

Be careful not to try too much at one time. Implementing too many changes at once won’t give you a good baseline to know what exactly is working and where to capitalize on your efforts.

Penetrating new opportunities

Market penetration can be the push you need to explore new territory and increase your piece of the pie in your industry. There are multiple ways to achieve gaining more market penetration as well as obvious benefits to doing so (like more profit). 

Let’s recap a bit:

• Six market penetration strategies: Expect each to have a different impact varying from business to business. Don’t be afraid to cater them to your small business needs.
• Company history as a starting point: If you use a powerful accounting software, this information will be easy to find since it’s stored and organized for your convenience.
• Implement slowly: Use the strategies one at a time to better gauge what’s working and what isn’t to boost sales.

Much like finding your target audience, market penetration can take some time, but patience in business yields the greatest rewards. In the meantime, focus on your existing audience and how to add value through your current product or service.