Here is a simple market potential calculation example for you.
Suppose you have a well-established product in the market. But now, you want to expand your market reach by launching your product in a new market. This new market can be an overseas market or a different state within your own country.
How do you decide if you should take such a step? How will you know if your product will perform well in the new market? This is why you must calculate the market potential. We will understand this better with the help of a market potential calculation example. Check out.
What Is The Market Potential?
The market potential is a process of identifying if a product or service can survive or reap benefits for the business.
Before launching a new product or service, calculating the right market potential plays an integral role. Though mainly all entrepreneurs calculate the market potential, only a few estimate it more precisely. Sometimes, a wrong calculation provides an unrealistic market potential.
To determine the market potential, estimate the sales of a product or service. To reach this estimate, consider important factors that we discuss in the next section. Each of these factors is important to arrive at a feasible market potential figure.
How To Calculate Market Potential?
The market potential is calculated with the help of key factors that govern the sales of a product or service. These key actors include:
Market size plays the most crucial role in calculating market potential. It has a wide scope and estimating it is essential for calculating market potential ahead.
Market size is the estimation of the total potential consumers of a product or service. Here is how to determine the market size:
Defining Target Customer/Audience
Any market size estimation starts with defining your target audience. The target audience is the potential customers of the product or service a business plans to launch or bring to the market.
For this, you should first define your target customer. For instance, if you are planning to bring a new car to the market, you need to determine the type of customer that will be for. Determine if the car is suitable for the younger generation, older generation or caters to the need of all income groups.
Try to get the closest figure possible when calculating the number of the target audience. It can be in hundreds, thousands, or billions, depending on if you are an industry, enterprise, or startup. If you are an industry, your market size will reasonably be larger as compared to a startup. An industry selling car parts has a huge market size as it will be providing its features to all the potential automobile companies in the area.
Estimating Market Demand
The next step would be estimating its market demand. Market demand is about calculating the amount of only those customers/audience who will afford your product or will buy it.
For instance, if you are launching a new shampoo, your target audience will be anyone who uses shampoo. However, it may not be feasible to use for anyone who can’t afford it. Like a Loreal or Tresseme shampoo, it may only be for women in particular.
Another factor that shrinks your target audience is the distribution channel. This is another consideration to make when calculating your market size. Decide on the distribution channel you prefer. Do you prefer to sell your products directly to the consumers through online stores or retailers, wholesalers etc.
If you are launching your product overseas, you will have to consider the presence of intermediaries, the storage, shipping ports, trade restrictions, and other things. You will have to figure out the specific areas of delivery in case of delivery through online stores like Amazon.
Another factor to consider in calculating the market potential is market growth. Not only the present demand, but you need to look into the future growth of the market. For instance, entering into a market with a new PC will not be fruitful due to its stagnant demand now. People are not shifting towards the use of tablets, laptops, and smartphones instead of PC.
Market growth is an essential factor to look for. Use research and surveys and know the estimated percentage of market growth in the industry your product belongs to. Check out the estimated future growth of the industry and if your product will still be prevalent in those times.
The market growth is also similar to the penetration rate of a product. A higher penetration rate would mean a greater scope in the market. It also focuses on the ability of a product to enter a particular market. If you think your product is unique and can easily penetrate the already occupied market, this is called penetration rate. You can determine the penetration rate accordingly.
Market Potential Calculation Example
After considering the above factors and having the estimated figures with you, this can now be used to determine the market potential.
The market potential is calculated in different ways. The main factor that keeps intact is the market size. If you can determine the market size of your product/service, it is easier to calculate the market potential correctly. Let’s have a look at market potential calculation example.
Method 1: Using Market Volume And Market Value
The most common method to determine market potential is by calculating the market volume and market value.
The market volume is the potential market volume determined with the help of the number of target audiences and the penetration rate.
Suppose if you have determined the number of your target audience as 10,000 people and penetration rate as 60%, your market volume will be:
Market volume = number of target audience x penetration rate i.e. 1000 x 60% = 600 people
Now, to calculate the market potential in monetary terms, market value is calculated. If the market volume is 600 people and the average value of a product is estimated as $10 (if a product is a pen etc.). Then, market value will be
Market value = market volume x average value i.e. 600 x $10 = $600.
Methos 2: Using An Average Selling Price
Another method to calculate the market potential is directly by using the average selling price of the product or service.
In such a case, the market potential is
Market potential = number of target customers x average selling price x average annual consumption
So, if the number of the target customer is 600, the average selling price is $10 per unit, and the average annual consumption is 1000 units
The market potential will be 600 x $10 x 1000 = $600000
Method 3: Using Allocating Priority To Product/Service
Another method that is used to calculate market potential is by using the priority rate. Priority rate is the percentage of the people who are eager to purchase a given product or service. Allocating a priority rate to your product or service determines the potential revenue from the addressable market. For instance, if there is a severely high demand for the product before its launch, give it a priority rate of 1. This assumes that the customer will buy the product 100% once it’s launched. Such a thing usually happens when a smartphone is released and users pre-order it.
Suppose the demand for your product or service is average to low. Give it a rate between 0.6 and 0.1. This means, when a product is launched, it is only 10% to 60% likely to be bought.
This method also takes into consideration the market capture. This is the average number of units a customer purchases at a time multiplied by the percentage share of the market. Thus, after determining the priority rate,
Here is how to calculate the market potential:
Market potential = market size x market capture x average selling price x priority rate.
Estimating market size to be 10000 customers
Market capture: 3 x 0.01= 0.03
Average selling price = $10 per unit
Priority rate = 50% i.e., 0.5
Market potential = 10000 x 0.03 x $10 x 0.5 = $5000
Other Factors To Look Out For
The market potential is a broad subject that allows you to study your potential market in depth. As mentioned in the market potential calculation example, research all the important factors. Though these factors may not help you figure the market potential but still plays an integral role in determining the success of your new product.
Some of these factors include:
Determining The Competitors
Don’t ever underestimate the market and your direct competitors. To know your market better, you should always study your competitors better. Focus on the pricing strategy, their product strategy, their distribution channel approach, and everything else. This will help you in framing your marketing policies.
Launching a new product alongside a well-established product market is difficult if you want to penetrate deep into the market. You may also have to lower the price of your product even below its market value to allow the customer to consider it.
You need to study the consumer’s perception of what convinces them to shift from one brand to another. Analyzing the competitor’s product in-depth also helps you frame your strategy to enter the market accordingly.
The product type also is an essential factor in determining the market potential. A product can be of two types, a repeat product or a once-in-a-lifetime product. For instance, a car is bought once or twice in a lifetime, whereas daily need products like clothing, beauty, and bathing products are repeatedly produced.
Soap or shampoo is bought repeatedly, and people are likely to buy 10 to 20 soaps per person in a year. Multiply it by the number of target customers (i.e., market size), and you can get the market potential.
Marketing also helps in increasing the market potential of a product. The right marketing plan allows brands to spread awareness about the product. The user-generated content on social media is one of the ways to drive the sales of the product.
Also, advertising the benefits of using the products is a key to allowing customers to believe in your product. For instance, focusing on the benefits of using a good quality lens in your frames will increase your product’s credibility. For one, with an increase in screen time, the use of a good lens can keep your eyesight steady. Secondly, it also avoids the frequent headaches people experience.
Thus, relating your brand’s usefulness to customers’ well-being is a great way to drive sales forward and ultimately increase the market potential.
The ulterior motive of any business is to earn profits. Calculating profitability is another factor that helps in understanding the market potential. You can determine market profitability through various key indicators like return on investment, capital assets, sales, and others.
You can make use of any of these calculations to arrive at a reasonable idea of profitability. If you have low profitability, you can increase the market volume, such as in the case of fast-moving consumer products and vice versa in the case of industrial products.
One of the few things to consider before launching your new product is finding the market potential. With the help of the above information, ensure that it has a good market potential for your new product before launching it in the market.
A product launch is itself a costly affair. Not getting enough visibility among the target audience is the last thing any business would want. Therefore, by doing research well by taking the help of figures and surveys online, one can quickly determine the product’s market potential.
Utilize the resources in the best way possible to calculate the market potential, as explained in the market potential calculation example. Always try to keep the estimation percentage lower than your expectations not to reach an inflated market potential.
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You might also enjoy these popular International Expansion related articles International Market Selection For Startups, What Are The Four Growth Strategies? and What Is Market Penetration Growth Strategy? on a similar topic.
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