Running a startup is a constant struggle to maintain your place in the market while also growing the business. As you build a brand for your company’s product or service, you must hold onto customer loyalty. Consumers can be fickle, and the risk that they will leave you for the next shiny thing is always present. How do you balance keeping existing customers’ trust with expanding into new markets and opportunities? The Ansoff matrix, also known as the product market expansion grid, offers four strategies that startups can use to plan future growth without sacrificing existing loyalty. Read on to learn more about these growth strategies and see if they might work for your business.
What is the growth strategy?
Igor Ansoff, a Russian-American applied mathematician and business manager, first described the framework now known as the Ansoff matrix in a paper published in the Harvard Business Review in 1957. The paper describes four growth strategies for businesses:
- Product development
- Market development
- Market penetration
- Diversification
Businesses may use these strategies to expand into new markets or grow within their current markets. They can launch new products or continue to offer existing ones. Each strategy presents different levels of risk. Generally speaking, the strategy that pushes a business farthest from its established model poses the most risk.
While the Ansoff matrix can be a useful tool for business planning, it can present some difficulties for startups. The framework looks at business activities in isolation from the rest of the marketplace. It does not, for example, account for what competitors might do in response to new activities by a startup. This could be an issue for a startup that ventures into a new market without doing enough research about who is already there.
Four growth strategies
The four strategies represent combinations of the two methods that Ansoff identified for businesses to grow: they can decide whether or not to change their market and/or their product. Market penetration involves a business’ existing markets and products. On the other side of the matrix, diversification takes a business into new markets with new products.
1. Market penetration
A business using a market penetration strategy will work to increase sales of its existing products to its existing customers, while also increasing its market share by expanding its customer base.
- A company can make itself look more appealing to its existing customers, such as by offering discounts to get them to buy more products.
- It can lure customers away from its competitors by making itself stand out in some way, such as by offering additional features or benefits.
- It can seek to bring in new customers in the current market. Promotions and sales pricing often play a substantial role in this strategy.
Market penetration tends to work best when a market is still growing. It is not as effective, or it could stop being effective at all, once a market becomes saturated. Saturation may occur as the amount of product being sold approaches the total market for that product – i.e. when the supply catches up with the demand. At that point, a different strategy may be necessary.
Netflix offers an example of effective market penetration. The company has offered the same essential product – streaming video and, to a lesser extent lately, mail-order DVDs – for years. Its market – home entertainment – has remained the same. Its market share, however, has grown over the years and remains fairly solid.
The company has achieved this, in part, by offering a wide variety of programming, including hit shows like Stranger Things, Ozark, Bridgerton, and Squid Game. It offers free trials to new subscribers that gives them access to all of its programming options. This draws people in until they become paying subscribers, and they stick with the company even through subscription fee increases.
2. Market development
With market development, a company takes its existing products to new markets. This could pose bigger risks for a company than market penetration since the company will be venturing into the unknown. Greater risks, of course, can mean greater rewards, so many companies decide the risks are worth it.
A company can expand into a new market in at least two ways. First, it can promote new uses for a product that already has an established customer base, making it available to a wider range of consumers. Pharmaceutical companies do this sometimes with drugs when a new use receives FDA approval.
Another way to open a new market for a product is to introduce it to a new geographic area. A product that has established itself in one area could find success in a new city, state, region, or country. A company considering this kind of geographical expansion should research what it will cost to make this kind of move, how consumers would be likely to receive the product, and whether the product can be competitive in the new location.
At one time, Slack was one of many group messaging tools created for internal use by businesses. It was able to grow beyond that by paying close attention to how customers were using it. The data obtained from customers allowed the company to identify needs that the tool could meet. Beyond simply allowing employees to communicate with one another, Slack became a way for businesses to streamline their communications and create a convenient, portable system. The company has continued to develop and adapt the tool, including integration with other software-as-a-service (SaaS) products.
3. Product development
While a business may use market development to bring existing products into new markets, product development can help it introduce new products to existing markets. It is riskier than market penetration while posing a similar level of risk as market development.
Product development can help a company build loyalty with its customer base. The company may research the needs of its current customers to see what needs might be going unmet. It could have several options for how to proceed with this strategy:
- Develop a new product;
- Acquire a product from someone else;
- Acquire the right to distribute someone else’s product; or
- Enter into a joint venture to develop and distribute a product.
Tailor Brands offers an excellent example of the product development strategy. The company originally made a name for itself in AI logo design for entrepreneurs and small businesses. It decided to expand the services it offered to its existing customer base. It added more automated tools to its list of offerings for startup businesses, such as domain name registration and website creation.
The company recently launched an automated LLC Formation Service, which allows small business owners to create their own limited liability companies (LLCs) simply by providing some information and answering a few questions. The service includes compliance with specific state laws since the formation of LLCs and other business entities is handled at the state level throughout the country. It provides additional services for newly-formed LLCs, such as obtaining an Employer Identification Number (EIN) for the new company and acting as Registered Agent.
4. Diversification
Diversification entails introducing a new product to a new market. Businesses that use any of the other three strategies remain on familiar ground to some extent. Businesses that use diversification take the greatest risk, but once again the rewards could also be great.
A company may diversify in order to increase its visibility and appeal to consumers, and by doing so increase its profits. Once a company has established itself in a new market, the initial risk could lead to greater safety by protecting it from downturns in one of its markets.
In order to diversify, a company must develop or acquire a new product and research a potential new market. This requires a substantial investment of resources. The strategy tends to work best for a company when its existing products or markets have reached their maximum growth point. Several types of diversification are possible:
a. Horizontal:
A company offers its existing customers a new product that differs significantly from its other products.
b. Concentric
A company introduces a new product that is similar to its other products to a new market.
c. Conglomerate
A company or group of companies enters into new markets and offers entirely unrelated products to each.
d. Vertical
Also known as “vertical integration” this type of diversification involves entering markets located up or down the company’s existing supply chain. For example, a manufacturer could begin distributing and selling its own products, or a retailer could get into manufacturing.
Mailchimp successfully provided email software for years. In 2019, the company announced that it would be expanding its operations to include customer relationship management (CRM) software. Mailchimp’s co-founder and CEO noted at the time that small business owners may find it difficult to juggle multiple platforms with separate functions. The company’s goal was to integrate multiple functions and allow businesses to keep important data in one place.
