Ansoff Matrix, also called the Product/Market Expansion Grid, is a popular business tool used by managers to decide on the next frontier of growth. The tool was developed by Igor Ansoff who was an applied mathematician and business manager.
Ansoff Matrix is an important tool when it comes to strategic planning. Managers find themselves in a position where they have to decide how the business will scale to growth. This is a position where the stakes are extremely high because the decision will affect the long term success of the business.
In this article, we will demystify the Ansoff Matrix and how you can apply it to your small business.
The Ansoff Matrix model
The Ansoff Matrix offers 4 avenues of growth. The business managers should assess the potential effectiveness of each and implement one at a time.
These avenues are:
- Market penetration
- Product development
- Market development
Let us discuss each:
1. Market penetration
Market penetration is a growth strategy where you push an existing product in an existing market.
This strategy is highly used by businesses because it is less risky and less costly. When you have a product that is already in the market, it is easy to look for more sales rather than introducing a new product that is not known in the market.
Market penetration is less costly relative to other strategies in the Ansoff Matrix. This is because it does not require investment in product development. You do not also need the intensive marketing campaigns needed to introduce a product into the market.
Market penetration aims at:
- Wooing the customers of your competitors to buy from you. With proper advertisements, offers, and pricing strategy, you can woo people who buy from your competitors to buy from you. This will increase market share and revenues in the same market.
- Wooing your current customers to buy more of your product. Selling an extra product to an existing customer is easier than getting a new customer altogether. Market penetration achieves just that.
When to adopt a market penetration strategy
Market penetration should be adopted as the best strategy when:
- The market is still growing. In a growing market, market penetration is a good growth strategy for any business. A growing market is one whose population is growing rapidly and people getting more purchasing power.
- The product is already doing well in the market. If the product is proven to be acceptable in an existing market, then pushing it further in that market is a prudent activity. If the product is generating good sales and profit margins in a certain market, this is the best strategy to adopt.
- The competition is not bloody. There are markets where the competition is so fierce that investment in market penetration would only yield little results. In a bloody market place, it is better to move to a new market.
- The product is in the growth phase. The product life cycle (PLC) has 5 stages. These are: Development, introduction, growth, maturity, and decline. If the product is in maturity or decline, investment in market penetration would be a waste of precious advertisement budget and efforts. Products in these two stages should either become cash cows or you should divest.
- The business is operating on a tight budget. If the business does not have enough to develop a new product or get into a new market, market penetration then remains to be the most feasible growth strategy.
How to penetrate the market
Market penetration will require more investment of financial resources and effort. There is no gain without pain in the business world.
This can be done by:
- Increasing one on one marketing by hiring more salespeople, training them, and sending them out there to evangelize and push your product.
- More advertisements campaigns.
- Guerrilla tactics like price wars.
- Better customer service during and after the sale. This is important to make customers loyal. This will earn you repeat business.
2. Product development
Product development is the second growth strategy in the Ansoff Matrix. It involves developing a new product and selling it in an existing market. This process is hard and risky in most industries.
Product development is costly
Developing a new product can be very capital intensive. This is because you need to set a research and development team that is going to do the research and develop the new product.
This team is important because successful products need to be differentiated. You cannot just copy all the product features from your competitors and expect to succeed.
Why should people buy from you and not your competitors if the product is the same? In this case, you will lack a unique selling proposition for your new product.
Your new product should have the features that the market needs. This is called market orientation. Without thorough research, it is impossible to know what the market needs.
You can analyze your competitors’ products and seek to improve on them. Look at what is lacking and incorporate it into your product. As you do your marketing, make sure you emphasize these extra features. This will be your unique selling proposition for your product.
It is important to note that your competitors will seek to copy the new features or make something even better. This is why you should always be researching new ways of improving your product or make a new one altogether.
As you research and develop the product, make sure you don’t incur so much cost that will make your product so expensive for the market. There is a price ceiling for everything in the market. People are only ready to pay so much for a particular product type.
It is also important to understand that when you develop your product, your competitors will analyze your product and copy the features. This way, they will be able to offer the product at a cheaper price because they never incurred the research cost.
Therefore, make research a continuous process in your business. As the copy one feature, develop another one. This is what market leaders do. The more other firms try to copy the market leader, the more they innovate and move ahead.
Product development is risky
Sometimes, a product can fail in the market. The uptake of the product may be low. This is why most businesses do not develop new products. They would rather stick in the familiar zone.
Product development is risky but that does not mean that you should not do it. It just means that it should be done professionally after thorough research.
When product development and introduction into the market is successful, the business reaps big.
How to do it the right way
- Do your research and make what the market needs.
- Analyze your competitors’ products and make something even better.
- Make sure the price is within the market range.
- Develop a prototype and test the market.
- Set a budget to advertise the product and make it known in the market.
- Magnify the special features of your product in the marketing campaigns.
- Cross-sell and upsell it with the old product.
- Have a product in each stage of the product life cycle.
To do product development the right way, make sure you include everyone in your business. Let them become ambassadors for the new product.
3. Market development
It is the third growth strategy in the Ansoff Matrix. This is where you sell an existing product in a new market. After having success in a market whose growth prospects are dwindling, you can decide to venture into a new market.
You can also discover that your product is not compatible with your current market. You may need a market that has a wealthier population or otherwise.
This strategy is also very risky and capital intensive. The new market may reject your product. You also need to invest heavily in marketing to make your product known.
How to do it the right way
- Do the pilot phase and test the market before making a full investment.
- Invest in advertisements to make your product known.
- Make new business alliances with distributors in the new market.
- Have a unique selling proposition that sets you apart from the existing players in the market.
- Come up with a competitive strategy to gain market share.
Since this process is risky, make sure your moves are all calculated. With the high capital investment, the stakes are high and failure cannot be an option.
This is the 4th growth strategy in the Ansoff Matrix. It is where you sell a new product in a new market. The risk factor here is even higher since both the product and the market are new.
The new market may be the wrong market. The new product may also be the wrong product. This makes the risk factor double.
To do this the right way, you need to:
- Do thorough research on the new market and its participants.
- Develop a product that serves that market effectively and efficiently.
- Invest in intensive marketing campaigns to make your product known and accepted.
- Come up with a strategy to beat your new competitors.
- Analyze performance and make amendments to the product and the strategy.
To do this rightly, you need lots of research and a coordinated approach to implementation.
Final thoughts on the Ansoff Matrix
The Ansoff Matrix should guide you as a business manager on which growth strategy to adopt. This should depend on your position in the market and the number of resources you possess.
The risk factor of the product development and market development strategies is double that of market penetration. The risk factor for diversification is double that of product development and market development and 4 times that of market penetration.
Therefore, your risk tolerance should also be a factor. Make sure you undertake the cost-benefit analysis (CBA) of each before choosing any of the four strategies in the Ansoff Matrix.
To be successful in all of them, you need to invest in marketing and have a unique selling proposition. Investing in a good team to help in executing the strategy of choice is important.
The Ansoff Matrix is not a guide to what you should do. It just gives you the 4 options available and assumes that you will make the right choice based on your unique circumstances. I also hope that you will.
Founder/ C.E.O- Wealthy Wolves Consulting & Giimark Ltd/ Best-selling Author/ Speaker.