If your SaaS startup is looking for low-risk business growth strategies, creating a market penetration strategy should be one of the first things you think about. Although, before moving forward, it’s important to identify a clear definition of market penetration as it relates to SaaS and gain a better understanding of what market penetration strategy is by taking an in-depth look at some common examples.
Market Penetration Defined
Market penetration can have two different meanings. Explained in detail below, market penetration can be defined as either a measurement or an activity. In this article, we will review both market penetration definitions and how they relate to SaaS.
Market penetration definition 1 - a measurement
A business' market penetration measures how much their product is being sold relative to the total estimated market for that product, expressed as a percentage. This is also known as market penetration rate.
How to calculate market penetration rate
If you know your total addressable market (TAM), you can calculate market penetration rate with this formula:
Market penetration rate = (number of customers ÷ target market size) x 100
Establishing market size can be tricky depending on the nature of your SaaS product, as a potential customer base could be global and essentially target “everyone.” The more granular you can get with your ideal audience demographics, the easier it will be to make this calculation.
What’s a good market penetration rate for a tech business?
It’s suggested that average market penetration for a consumer product is 2 to 6%, while business products (B2B) can range anywhere from 10 to 40%. If your SaaS solution captures 10% of your TAM, for example, you’ll probably be doing quite well!
Let's take look at the smartphone industry to see how market penetration rates and market share can change:
As of Q2 2023 global leaders Apple and Samsung had a combined market penetration rate of 37%, with Apple coming in second at 17% and Samsung capturing the top spot with 20%. Five brands captured almost 80% of the global 5G smartphone market. A range of smaller brands (more than 100) take the remainder of the market share to its 100% completion.
Two of the top ten smartphone brands, Tecno and Infinix, have seen double digit growth in annual sales, while other top brands saw a decline — Apple experienced the smallest decline of the top five market leaders.
It's a tough market to compete in traditionally, but there are opportunities for the taking!
The market leaders offer premium priced products that keep getting more and more expensive without much innovation to justify the ever-increasing price tag, and that opens the door for savvy competitors to penetrate the market.
Market penetration definition 2 - an activity
Market penetration defined as an activity (see the Ansoff Matrix below) is the process of going to market with a product in an existing market in which current or similar products already live and taking market share from the other competing companies. This is also known as a market penetration strategy.
The Ansoff Matrix
The term market penetration (defined as an activity) stems from the Ansoff Matrix, developed in 1957 by Igor Ansoff, which helps companies plan their strategies for future growth. The Ansoff Matrix is a 2X2 matrix representing four different business growth strategies in which a company either enters a new or existing market, and with either new or existing products.
Market Penetration Strategy
Market penetration strategy is one of the four business growth strategies identified in the Ansoff Matrix, the other three being market development strategy, product development strategy, and diversification strategy. Market penetration strategy refers to when a company attempts to grow using existing products in existing markets, as shown in the bottom left quadrant of the matrix graphic above.
A low-risk market entry and growth strategy for tech startups
A market penetration strategy carries a low amount of risk — it's an ideal SaaS growth strategy often used by early-stage and bootstrapped startups, or those unwilling to invest heavily in riskier endeavors.
In other words, the company plans to increase revenue by growing its customer base in a market where similar products exist, gaining market share little by little and taking business away from competitors.
Growing in an established market is a relatively safe bet, because it means there is already a need for your products or services. However, it requires implementing smart product positioning, pricing, user experiences, and marketing tactics in order to compete and grow alongside dominant companies in the market.
How to develop a market penetration strategy
When you’re thinking about creating your market penetration strategy and increasing your market share, you’ll need to consider the different ways you can drive sales revenue from the customers out there in your market using your existing SaaS offering.
This can be accomplished with the following tactics:
Put simply, you need to acquire more customers and revenue by making your product more appealing to potential buyers in the market. Let's dive deeper into how you can do that.
SaaS Market Penetration Strategies
1. Price competitively to take additional market share
Pricing is one of the main tactics that SaaS startups use to penetrate a market and grow their revenue. These adjustments can be easily measured to determine their level of success, too.
Did market share increase or decrease when you moved from monthly subscriptions to annual contracts?
How many new customers were acquired after you launched your new pricing plan?
Does lowering your subscription prices help lure customers away from your competitors?
Price drops works well in competitive niches where consumers are typically buying based on the cost of a product. After looking at your competitors and comparing your product and services, adjust your SaaS pricing strategies in order to increase your market penetration rate.
2. Increase your marketing and sales efforts
Changing tactics or becoming more aggressive with your marketing campaigns can help to increase awareness of your SaaS startup in the market. Competitors’ customers can't make the switch and sign up for your product if they don't know it exists, after all.
Marketing can also help persuade your existing customers to stick with you instead of leaving for the competition. Loyalty programs, power user features, strategic alliances, and finding unique ways to deliver value to your users can all help you retain customers. If your users have a stellar experience with your product, they’ll also be more likely to promote you through word-of-mouth, which in turn helps increase your market share.
3. Acquisitions and mergers
If you can’t beat ‘em, join ‘em. Or rather, buy them out. Acquisition as a market penetration strategy is almost as old as business itself. Buying a company in your industry means you’re essentially buying the customer base and the market share that it brings with it – or alternatively, you can buy the competition and then shut them down altogether.
If you’ve got the motivation and the budget, acquisition can be an effective tactic. If you’re in startup mode, acquisition is probably not in your ballpark just yet. In this case, you could look into strategic mergers with partners or similar companies in order to capture their audience and widen your market by doing so.
4. Make changes to your product
Listening to your customers and keeping track of what competitors’ customers are saying can help you pinpoint essential features and functions that really add value. A slight adjustment to your product could make all the difference in terms of your market penetration rate by giving the market what they need but can’t get from any other company.
Real-World Examples of Successful Market Penetration Strategies
Acquisition is huge in the SaaS world — industry giants like Facebook and Microsoft regularly snap up smaller companies in order to expand their businesses and further penetrate markets.
Diet Coke was a huge hit, but it attracted primarily female consumers. Coca-Cola’s solution? Coke Zero, which is essentially the same in terms of taste and benefits, but squarely positioned and marketed to capture the male market they were missing.
Samsung is well known for its penetration pricing strategy. By offering its phones at a lower entry price with more pricing tiers, it aggressively lured consumers away from Apple to dominate the global smartphone market.
Penetrate your market and accelerate business growth
A successful market penetration strategy requires selling more of your SaaS product into an existing market in order to gain more of your competitors’ customers and ultimately increase your market share.
With careful analysis of competitors, ample customer research, and some clever promotional ideas your SaaS startup can slowly start to gain dominance in an existing market, but often there's only so far you can grow under your own steam.
Small injections of capital can help you scale up, jump on opportunities, and reach growth milestones faster, which is the kind of traction you need to eventually become a market leader — you don't have to spend months pitching VCs and selling the company you worked so hard to build, either.