- The elements of determining market potential
- For those starting or expanding a business
- Forecast your potential customers
Before you launch a business, or before you embark on any expansion into new offerings or territories, it is prudent to calculate your market potential. This overview gives you a sense of the geographic size of your market, the customers you may be able to reach, existing competitors, and more. The stronger the market potential, the more likely you are to succeed.
You can determine the market potential based on Census data, other publicly available information, or your own market research. The benefits of understanding the market potential include being able to identify new customers, find opportunities for growth, increase revenues, and develop plans for weathering revenue shortfalls.
- The market size, or total sales potential for your product or service
- The “addressable market,” or size of the market you can feasibly target
- The market growth rate for the sector and the product or service you are offering
- Anticipated profitability
- Profiles of the customers you seek to acquire
- Competitors that have already been established in the market
- How frequently customers will purchase your product or service
Millions of people could be in need of your product or service, but it’s not realistic to target this large of a market; furthermore, potential investors will be skeptical if you claim you can capture such a large market share. The addressable market narrows the focus to a smaller group, such as a niche market or customers in the local area.
You can follow up this initial focus with a “bottom-up” analysis for future growth. One notable example is Amazon, which first gained a market foothold as an online bookseller before expanding its e-commerce offerings to a much wider selection of goods and services.
Developing a profile of your target customers can also help you determine your market potential. This profile can include demographic information, problems they are looking to address, and preferred shopping methods and marketing channels.
Assess the profitability of your product or service, including how many sales will be needed to reach desired profits. Something that generates low profits can still be successful if sales will be high. Consider whether your offerings will be purchased frequently or if they represent major expenditures that customers will only buy once every several years, such as a new appliance.
The market growth rate assesses whether demand for your products and services is growing or fading. Scrutinizing data from the past five years can help you determine which way the market is going.
Be aware of any major shifts in the industry and how you might adapt to them. For example, digital cameras upended the market for traditional film, only to be undermined by the shift to smartphone-based cameras.