How do you know which strategy will grow your business most effectively in the short and long term? Market penetration, market extension, product development or diversification are the primary strategies for building your business. You can also grow organically (growth in your own business) or by acquisition (of another business). This article summarises what these strategies are, and when you would be most likely to use them.
Market penetration is based on taking the opportunities to sell more of your products or services into your existing market, or penetrating deeper into your market.
Since it costs on average 5-10 times more to source new customers than to work with your existing customers, it makes sense to adopt this strategy if you can.
It will be most applicable if:
- You have a reasonably large base of potential customers in your existing markets
- There is an opportunity for you to sell more of your products/services to your existing customers, and to sell to new customers from the same existing market segment
- You want to sell more of you existing products/services
- Your products/services are still competitive
How to implement this strategy:
- More aggressive promotion and marketing
- More, or more effective, channels to market (whether direct sales or via third party distributors)
An example of this strategy would be Telstra and it’s mobile service. Telstra has penetrated deeply into its existing market (Australia in broad terms), using extensive promotion and advertising, and a continually expanding distribution channel of resellers and its own retail outlets. As a result, it has the largest share of the mobile market.
Market extension is when you identify new markets to sell your existing products and services into, whether they are new geographic markets (interstate, regional, international) or new segments in the same geographic market.
It will be most applicable if:
- You have secured a strong customer base in part of your defined market, and still have other areas or segments that still offer opportunities to you.
- You are reaching saturation in your existing market (you have the dominant share)
- You are able to access new markets through the right distribution channels or through your own presence in those markets
- You have the cashflow to fund the time and cost it takes in breaking into new markets
- You have researched the market thoroughly and understand the potential gain and the risks
- You have the ability to service those new markets well
A simple example of this is when companies open offices or branches interstate, to replicate the success they have had in their own market.
Product development is when you develop new or improved products for your existing markets. Product development may take the form of a new product altogether (for example a new software package), an extension to a product (for example a new feature set/enhancements to the existing software package), or a product add-on (for example, a new software module).
- Products and services are often developed when there is customer demand for them, or when technology results in newer versions being available or created by your competitors, or when you have a great idea and research indicates there would be a market for it.
- Product development requires funding, planning, research, testing, marketing, selling through appropriate channels and more testing.
- If you develop new products or services you must do so objectively, and listen to your customers, take notice of the market research and feedback, and be honest about how competitive your new products will be. Don’t waste time or money launching products or services that won’t sell, or won’t sell enough.
- Product development must be an ongoing process to some extent, as no company can survive on an unchanging product or service, year in and year out.
- Generally it’s fair to say that if you don’t develop and enhance your products, then your competitors will and will overtake you.
An example of somewhat extreme product development is Coca-Cola when it was selling Lemon Coke, Caffeine-Free Coke, and Vanilla Coke into its existing markets, alongside regular Coke and Diet Coke. This strategy has similarities to the one used back in the ‘80s, when Coca-Cola had Classic Coke, New Coke (when they changed the original formula), Cherry Coke, regular Diet Coke, Caffeine-Free Diet Coke, Tab, Caffeine-Free New Coke and Caffeine-Free Tab. It created a lot of consumer confusion, and eroded the brand power of the original Classic Coke.
A simpler example of product development is the breakfast cereal manufacturers developing breakfast cereal bars, for breakfast ‘on-the-go’.
Diversification is the strategy of developing new products for new markets. This strategy requires a cautious approach as it is based on many unknowns: a new market, an untested product, probably new distribution channels, and probably existing suppliers already competing in the target markets.
Use this strategy if:
- you have a large budget for product development and market research
- you can support this strategy (and the time it takes to start generating revenue) with existing cashflow from the business
Acquisition is a strategy used to fast-track business growth by acquiring, rather than building, new business. You may acquire another company for several reasons:
- to acquire their customer base
- to acquire their revenue and profits
- to generate economies of scale (and reduce costs) for the combined entity
- to acquire their products
- to acquire their expertise
- to access new markets
The acquiring company retains overall control of the combined business, and may agree to buy all or part of the other business. Future articles will cover some of the key considerations regarding acquisitions.