A Primer On Market Penetration Strategy For Product Managers
If you ask any founder or product manager who has worked with newly-launched products, "What was the hardest but also the most rewarding challenge you had to overcome?", I'll bet the vast majority of them would say that it was getting the first 100 users.
While the very beginning of a business feels super-challenging for most founders and PMs, I think the immediate next step is actually the hardest for “fresh-from-the-oven” products—penetrating a market.
Today, I want to share a couple of handy strategies with you that will help you overcome this challenge and successfully enter your market.
What Does Market Penetration Mean For New Products?
If you're like most entrepreneurs or product managers, you're probably not dreaming of the first, first ten, or first hundred users. It's more likely that you dream of being #1 in your market and reaching billions in sales. This means that you will need to take your product out to the wild and start offering it to your target users with the hopes that most of them will like your product and sign up for it.
The bad news is that, almost certainly, you are not alone in the market, and you need to compete with either well-established behemoths, market leaders, or small and agile startups like yourself.
So, in order to grow, you will need to solve a couple of major problems for your product:
- How to tell people about your brand (a.k.a brand awareness) and product in the existing market.
- How to differentiate and stand out among similar products offered by your competition.
- How to grow your user base and take away users from existing products in the market.
- How to prevent churn, or in other words, avoid losing users to competitors.
To accomplish these, you (as the product manager or founder) and your marketing team must join forces and develop a market penetration strategy, which is the set of steps and tactics that you plan to use to enter the new market and increase your share in it.
There are three essential reasons the product team is involved here.
- Although implementing a great marketing strategy will get you a lot of users, you will end up losing them if your product cannot solve their problems and keep them happy.
- If done right, your product can be a strong market penetration and growth tool—we’ll talk about product-led growth and acquisition loops shortly.
- You need to have a diversification strategy by developing your product’s unique value proposition and features based on what’s going on in the market to be able to differentiate yourself from the competition.
Now, let me show you what a successful market penetration strategy looks like in real life.
When Tesla launched its Model S in 2012, the company was barely visible in the electric car market and almost did not exist in the general car market. However, thanks to their sound market penetration strategy, they were able to sell around 22,000 vehicles in the first year and deliver a staggering 1.3 million cars in 2022.
The strategy they adopted consisted of a variety of elements, including the following:
Great Product: Let’s be honest, Model S was the first electric car that was not horrible. On the contrary, it was actually a much better car with its design, performance, and features than the majority of gas-powered cars at the time.
Showrooms: Tesla was selling their cars directly without the involvement of dealerships. However, to let users experience what it is like to drive a Tesla, they opened showrooms in strategic high-traffic spots across the United States so anyone could come for a test drive.
Great Environmental PR: Being electric vehicles, Tesla owners were eligible for a wide variety of government incentives for significantly reducing their carbon footprint. Moreover, Teslas gained the reputation of being environmentally friendly vehicles that anyone who cares about the planet should buy.
Infrastructure: One of the main problems of electric vehicles back then was their range. Although Teslas had a superior range compared to others, you could not really drive from LA to New York on it. Therefore, the company invested heavily in a network of superchargers across the United States that were close enough to each other to let you drive your Tesla across the country.
As we can see, Tesla’s strategy was a combination of both marketing tactics (showrooms, green PR) and product features (great cars, great infrastructure) working together to make sure that everyone in the U.S. (and soon after, in the whole world) wanted to own one of their cars.
Ok, we’re done with the theoretical part of the market penetration strategy; let’s move on to the practical stuff and look at some of the most common and valuable strategies you can consider next time you bring something new to the market.
Note: If you want to learn more about the theory of market research, product market development, and business growth using penetration marketing plans, check out the Ansoff Matrix by Igor Ansoff.
Market Penetration Strategies For Early-Stage Startups
Before I begin listing these strategies, let me give a quick disclaimer—none of these will guarantee you lightspeed growth in your market. Every market is different, and the players within it are different too. Therefore, a strategy might work great in one market and fail miserably in another.
For each of the strategies below, I will suggest which type of market these would best fit. My general advice, however, is to actively “test the waters” with all types of strategies and see which performs best for your specific market.
Alright, let’s take a gander at these examples of market penetration.
#1: Product-Led Growth Coupled with Targeted Marketing
This is probably the hardest one among the bunch. But, in my opinion, it can also offer the best results both in terms of effectively penetrating the market and doing it stably and sustainably.
Product-led growth (PLG) is the approach of building products in which you are placing your user’s needs in the center of your attention and shaping your features and capabilities in a way that makes your product act as its own marketing channel.
Products built with PLG in mind, for instance, actively take advantage of the concepts of free trials and free plans. The logic here is that, apart from using your marketing channels to tell your users how great your paid features are, you are letting them use them for some time to experience the value themselves.
This tactic is actually quite powerful. Imagine that you're running a catering business and want to buy a task management tool to help you keep everyone’s tasks and activities organized.
After a bit of research, you decide to give Trello a try. The free version of this tool comes with a card-based drag-and-drop interface where you manage your tasks. This solution partially covers your needs, but it is still a hassle for you to plan the routes of your vehicles that deliver the food and catering equipment to your client’s venues.
The clever product folks at Trello, however, offer you a free trial of their Premium plan, where you have the map view that lets you assign addresses to your tasks and view all of your tasks on a map.
Although you might have seen this feature on Trello’s website, you may not have been confident that it would be able to address your particular need. As such, you were not ready to risk buying the Premium plan to check if this feature is what you really need.
With the free trial, however, you get to use it in real life, personally experience its value, and gain the confidence to buy the paid plan.
To be fair, PLG is not a substitute for your marketing efforts. Instead, you can use these two together (using product-led growth software) to amplify the impact.
In this case, marketing will ensure that you are targeting and bringing in the right people (with the right needs and with high intent to try your product). Product, conversely, will ensure that these people get their pains covered and continuously use your product with a grin on their face (and little chance that a competitor will take them away from you).
The reason I consider this one of the best strategies for market penetration is that the combination of PLG + Target market focus ensures that you are predictably and sustainably attracting more and more new customers from your market to use your current product, retaining them in the long run, and decreasing your churn.
When to use this strategy
PLG is a great fit if your users are able to relatively quickly and easily experience the main values of your product. Most SaaS products fall under this category, including Trello, Mailchimp, etc.
When to avoid it
Probably the main case when PLG will do more harm than good to you is customized enterprise products with steep learning curves. The reason is that you are spending a lot of time and effort to add features to your product that your enterprise customer wants, and you don’t really want to go through all of that unless you have a commitment from the customer.
#2: Penetration Pricing
The next strategy in our list is way older than computers and even electricity. We are, of course, talking about entering the market with a product similar to what your competitors offers—but at a lower price!
Be careful with market penetration pricing strategy, though, because your actions might end up classified as price dumping, which is illegal in most jurisdictions.
If you do everything legally, though, penetration pricing can help you get a head start and rapidly expand your market share.
With this tactic, you need to consider your company's ability to survive the operating period with lowered prices. Is your gross margin large enough and your cash reserves large enough to be able to do penetration pricing in your market?
If not, you might share the fate of Rdio—a music streaming service that cost only $5 a month.
Rdio was doing price adjustments and offering its product line at a much lower rate than its competition, which helped them quickly enter the market and ensure a high market penetration rate among its target audience.
However, the licensing costs of offering all of this music were much higher than the sales volume they were getting from subscriptions. We should also consider that their marketing campaigns burned a lot of money, too.
Sadly, this led to Rdio burning all of its cash and capital and filing for bankruptcy in 2015.
When to use this strategy
Penetration pricing is acceptable for price-elastic markets, in which users will be more than happy to change their vendor for a lower price. An example of a price-elastic market is consumer cloud storage services, like Dropbox.
When to avoid it
Apart from markets with low price elasticity, you should also avoid those where the switching costs are high. For instance, if your company’s documentation is in Notion, you would be highly unlikely to migrate it to another tool, even if the tool had a lower price.
#3: Strategic Partnerships
You don’t always have to be alone in your journey to conquer the market. Sometimes, you can partner with other companies and try to enter the market together.
Strategic partnerships are usually win-win agreements. It means the company you consider your partner benefits from your entry and growth in that market.
Here are some examples of these agreements:
Improved product offering in exchange for market expansion: This is when the combination of your products is better than what you could have offered in the market alone. A great example of this is Mozilla Firefox and Google Search.
Without Google, Mozilla would not have a good search engine for its browser. And at the time that Firefox was launched, Google had yet to launch Chrome and had a vested interest in a popular browser using its search engine by default.
Product affordability in exchange for long-term subscriptions: When iPhone launched in the U.S. its price was above $600 and was unaffordable for most smartphone users at the time. Thanks to their partnership with AT&T, however, they were able to offer the phone for $200 if the buyer subscribed for an AT&T mobile phone plan.
This deal resulted in Apple growing rapidly in the smartphone market and becoming one of its largest players.
When to use this strategy
When some products and services complement yours but not don't compete with it (e.g., laptop manufacturers complement operating system developer’s products and act as distribution channels).
When to avoid it
Avoid this strategy if you cannot create a win-win relationship with another company. Consider it a red flag if there is no win-win relationship, but a certain company wants to partner with you anyway.
#4: Growth Loops
Finally, there's another long-term and sustainable approach to penetrating your market.
Growth loops are strategic user experiences in your product that let your users share it with their friends, colleagues, or even customer base (depending on the loop type) and help you acquire new users with minimal effort.
A typical example of a growth strategy using a loop is Google Drive’s sharing feature. When you are working on a document and want your colleagues to join and collaborate with you on it, you are sharing the document with them.
In order for them to access this document, they need to create a Google account and join Drive.
The reason I love this approach is its self-reinforcing nature. The more people join your product, the more they will share with others, who will join you and share with their own friends, etc.
When to use this strategy
Growth loops work great for products where sharing or casual contact with your brand can happen naturally (e.g. sharing files on Dropbox).
When to avoid it
Growth loops start working properly only when you have above-average traction and your main digital marketing channels are able to ensure a sustainable inflow of new users. This means that loops will give you zero impact in the very beginning when you only have a couple of customers.
You've got this!
Market penetration seems really hard (and honestly, most of the time, it is). But, through trial and error, you will soon find the tactic that works for you the best and successfully enter the market.
I hope that the four strategies that I shared with you come in handy when the time comes for your product to launch.
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