Penetration strategy is the concept of taking aggressive action to greatly expand one's share of total sales in a market. The resulting increased sales volume typically allows a business to produce goods or obtain merchandise at lower cost, thereby allowing it to generate a higher profit percentage. Also, as the organization acquires more market share, this reduces the sales of its competitors, possibly forcing some to drop out of the market. There are a number of ways in which a business can engage in penetration strategy. The most common alternatives are as follows:
- Price reduction. The most common penetration strategy is simply to reduce prices. If customers are price sensitive, they will respond by buying more of the company's products and services. However, this approach only works if a company's offerings are considered to at least have the median level of quality of competing offerings. This approach is not a good one when competitors can easily match or exceed the company's lowered prices, thereby initiating a price war. Also, lower prices may reduce customer perceptions of the value of a company's goods and services, so that a return to higher prices at a later date cannot be achieved.
- Terms improvement. A company can offer longer payment terms or a more generous product return policy. This approach will likely allow the company to scoop up sales from the more financially unstable customers in a market, and can result in large bad debt losses. It also requires more funding to pay for receivables that are outstanding for longer periods of time.
- Expanded marketing. A company can spend more marketing funds on improving the branding of its products. If combined with no increase in product prices, the result can be a perception that a company's offerings are a bargain, resulting in additional market share.
- Product differentiation. One of the better penetration strategies is product differentiation, where a company creates new products that are notably different from and better than those of competitors. It can take time for competitors to respond, giving a business the time to garner more market share.
- Distribution channel expansion. A company can create a number of new ways in which to sell its goods into a market, thereby addressing a larger audience. For example, distribution could be through the Internet, retail stores, and street vendors. If competitors do not sell through one of these channels, a company can gain market share for as long as there is no response to this strategy.
Of the preceding strategies, the use of price reductions and terms improvement tend to have the most ephemeral results, since they can be easily matched by competitors. Differentiating with marketing, products, and distribution channels tends to have more long-lasting results.
Penetration strategy is also known as market penetration strategy.