There comes a time in any retail store owner’s life where plans for expansion feel more like an exciting necessity than merely a potential option.
Increasing customer demand often forces retailers to hire more staff and produce new products. But the expansion process is lengthy. You’ll need to secure a new location, run a huge marketing campaign to drive attention, and partner with other local retailers to break into new markets.
Each of those makes headway to one overarching goal: increasing market penetration.
This guide shares why market penetration should be a metric your retail store keeps track of, with bonus tips on how to increase it (and ultimately generate more revenue.)
What is market penetration?
Market penetration is the percentage of customers a retailer sells to out of the total addressable market.
A good market penetration rate for consumer products ranges from 2% to 6%. Retailers on the higher end are more likely to experience high foot traffic to their stores, and subsequently, stronger brand equity and higher profits.
Market penetration is a very important indicator that informs you if your marketing and sales efforts are effective.
So much so that market penetration is three times more likely to be the main driver of a retailer’s profit compared to customer loyalty.
5. Market penetration
How much of your total addressable market is being addressed already?
What would it look like for you if you got 100% the market?
How much do you already have? How much is being served by a competitor? How often are they switching?
— Marc Thomas (@iammarcthomas) October 22, 2021
Market penetration vs. market share
Market penetration and market share often get confused. Both involve intimate knowledge of your target market. Penetration rate shows the percentage of your target audience that you sell to. Market share, on the other hand, is the percentage you claim out of the total addressable market.
Let’s say a hair care retailer generates $50,000 in revenue from its 1,000 shoppers. The entire hair care industry generates $10 million, giving the retailer 0.5% market share.
One of the key differences between the two metrics is that competitors can have similar penetration rates. Instead of market share being the percentage of all sales they make in a particular market, retailers can both count the same individual shopper in their penetration rate.
How to calculate market penetration rate
Market penetration is an important metric for retailers and to calculate it you need to understand bot the metric itself and the formula associate with it.
Market penetration as a metric
Retailers use market penetration as a North Star metric, since it shows progress toward overtaking competitors and claiming market share. The higher your penetration rate, the more profits you’ll generate.
Market penetration rate formula
The market penetration formula is:
(Number of customers / Target market size) x 100 = Market penetration rate
For example: if you have 1,000 monthly shoppers in an area where 20,000 people would likely purchase your hair care products, your market penetration in that area would be 5%.
Market penetration strategies
- Market penetration as an activity
- Market penetration pricing
- New product launches
- Increased marketing
- Expand to new locations
- Amplify sales channels
- Update products
- Strategic partnerships
Dissatisfied with your own market penetration? Let’s take a look at nine strategies to increase your retail business’ market penetration rate.
Market penetration as an activity
The term market penetration became popular after Igor Ansoff, a mathematician and business manager, produced the Ansoff matrix : a two by two grid that shows four growth strategies for businesses.
Market penetration is Ansoff’s suggested activity for retailers promoting existing products to an existing market. The more consumers you can capture in an existing market, the more sales you can generate for a current product.
Market penetration pricing
Price is one of the most important factors in a consumers’ purchasing decision. Shoppers want to know they’re getting the best products at the lowest prices.
The penetration pricing strategy is used by retailers that price comparable products at a lower recommended retail price than competitors. Price adjustments—and often profits—come over time, once you’ve already gained market penetration and built brand affinity.
Not prepared to take this route and engage in price wars with competitors? Kate Collinson, managing director of Kate Collinson Digital Consulting, says, “The opportunity for brands in 2022 is really being able to focus on customer attention and brand identity.
“So [you create] a brand that customers can really identify with and will remain loyal to, despite there being rip-offs of their product elsewhere.”
There’s a certain amount of people that just shop price-based. The truth is, you’re never going to be able to steal those customers away from the giants in the industry that have just insane pricing because of tons of volume and tons of market penetration. For us it’s not something we worry about. There’s a lot of people out there that need what we’re serving.
New product launches
Apple has the largest market penetration of the smartphone industry. The fact it’s one of the most innovative companies ever to exist is no coincidence.
“My best tip for increasing market penetration is to focus on innovation and customer satisfaction,” says Luke Lee, co-founder of Ever Wallpaper. “If you can find a way to innovate and improve your product or service, you’ll be more likely to attract new customers. And if you can consistently deliver excellent customer service, you’ll keep your current customers coming back for more.”
The more people are aware of your retail store, the greater your chances of increasing market penetration. Execute a local marketing plan to build brand awareness and drive foot traffic toward your store, using tactics such as:
- Retail signage to divert passersby
- Geotargeting, such as a Google Business Profile listing
- Facebook advertising campaigns that target people within close proximity to your store
- “I think it’s the brands that are really doubling down on email and text. [They’re] what we describe as those owned-marketing channels, no one can take that away from, no algorithm, etc. Those are the brands that are going to thrive; they’re the ones that are investing in nurturing those relationships through channels like email and text, as opposed to driving further reliance on paid ads through Facebook.” —Ben Jabbawy, founder and CEO of Privy
Attract and retain customers with Shopify
Only Shopify gives you all the tools you need to find new customers and keep them coming back. Connect with local shoppers on Facebook, Instagram, and Google, build customer profiles to fuel your retention marketing email campaigns, and more.
Expand to new locations
Despite the shift to online, in person is still the preferred shopping method for almost half of consumers. Reasons range from a desire to interact with a sales rep pre-purchase to avoiding shipping costs. Either way, increase your market penetration and reach those customers by expanding into new locations with a physical store.
Some retailers use market penetration to guide this retail location strategy. Take it from David Eberst, co-founder of NAIPO, who consulted Google and Bing ads data. “You can check where the most searches came from and take that into consideration,” he says.
“Many people from Munich were searching for massage chairs,” David discovered. “This was a signal to us that we should open a showroom there. It played a significant role in our decision-making process.”
💡 PRO TIP: to analyze where customers are located and if they’re congregated in certain cities or neighborhoods, view the Customers by location report in Shopify admin.
Amplify sales channels
To say brick-and-mortar retail can completely replace online is a mistake. Retailers increase brand exposure by blending several sales channels, such as:
- Physical retail
- Pop-up shops
- Social commerce
- Livestream selling
This diversification strategy means potential customers always have a method to purchase your products via their preferred shopping method.
💡 PRO TIP: To compare your brand’s total online and retail store sales over time, view the Sales by channel report in Shopify admin.
For even greater market penetration, prioritize brand loyalty. Happy customers lend a helping hand when tapping into new audiences. Do this with blended fulfillment options that more than half of shoppers want, such as:
The easier it is for a customer to get the item they’ve purchased, the greater your chances at word-of-mouth marketing becoming a key driver of market penetration.
💡 PRO TIP: Set up local pickup in Shopify to start offering in-store pickup as a delivery option at checkout. Pay less on last-mile delivery, speed up fulfillment times on local orders, and drive more foot traffic to your stores.
There’s a reason why trending content is incredibly fast-paced on social media: customers love to see new things. Use that insight in your market penetration strategy by updating products based on customer feedback.
Ask existing customers how your products could be improved. Look to comparable products sold by competitors and use those insights to refine your product. It’s a smart strategy not only for increasing customer satisfaction—fancy new products are the foundation of many profitable marketing campaigns.
💡 PRO TIP: With Shopify, it’s straightforward to track sales by channel, store location, or product over time. To get started, view Sales reports in Shopify admin.
Increasing market penetration can feel like a slog. It’s a long-term strategy—one that can be supercharged by acquiring another retail business that’s already done the hard work for you.
Let’s put that into practice and say you’re operating a coffee shop in Dallas. In your quest to increase market penetration in Texas, you find another independent retailer in Austin. You acquire their business, hire a team to run it, and immediately increase market penetration.
Granted, acquiring an existing business is expensive, especially if it comes with a solid reputation, loyal customer base, and owned assets (like the building it operates in). But it’s a fast-track way to increase market penetration.
Don’t have thousands to invest in acquiring another store? Partnering with local retailers can have the same impact at a much lower cost. So much so, almost half of retailers have increased their revenue as a direct result of a partnership program.
Make partnerships with other local companies that preferably share your audience but are not direct competitors. NAIPO, for example, partnered up with local gyms.
Strategic partnerships can take many form, including:
- Co-marketing campaigns
- Co-hosted events
- Collaborative products
- Brand licensing
The secret to using strategic partnerships is being selective with who you collaborate with. Retailers reaching the same demographic using alternative distribution channels and selling non-competing products are your safest bet.
The licensed product definitely spreads faster on social media. And when people buy it, they love sharing it. That’s a huge part about our businesses and our positioning: we’re fun.
Examples of successful market penetration
The world’s most valuable brands have executed a strategy to claim high penetration in their industry. Let’s take a look at three examples of market penetration and what you can learn from them.
Apple products are everywhere. Anywhere you go in the world, you’ll find people using an iPhone, Apple Watch, or other iOS-powered device. Its high market penetration helps makes it the most valuable brand in the world.
Apple uses its brand affinity to increase penetration rate of similar products launching in new markets, such as:
Do you ever look at your MacBook and just think, wow.
Silent. Fast. Probably pound for pound the best speakers in the world. The finest commercial industrial engineering. Impeccable design.
What dynamics created Apple? How can we have an Apple in every category?
— Andrew Allsop (@AndrewAllsop) May 11, 2022
Kraft Heinz has the highest penetration rate of all food brands in the US, with 84% of its target market purchasing a food product from brands under the Kraft umbrella.
Acquiring other brands played a major role in Kraft Heinz’s ability to penetrate so many consumers. Both Cadbury and Philadelphia Cream Cheese are amongst its list of acquisitions—many of which had existing customer bases that contributed to Kraft Heinz’s market penetration.
While Costco’s exact market penetration rate isn’t publicly available, it’s a shining example of how retailers can use penetration pricing as a way to claim market share.
Every day shoppers can purchase items in one of its warehouses at lower prices than other big-box retailers or department stores. It’s why 81% of US consumers know of the brand (more than a third of whom like it), and almost a quarter of online grocery delivery users use Costco.
Create a market penetration strategy for your store
Market penetration is a solid metric to rely on as you scale your retail business. The more customers you have, the greater your chances at driving profits for the store.
While the quickest way to increase market penetration is to acquire another retail brand, don’t write your own strategy off if you don’t have thousands to invest. New product launches, competitive pricing, and strategic partnerships go a long way when increasing your penetration rate.
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