What is Market Potential? How to Determine It

Whenever we launch a new product or a service, we fear whether it has enough market potential. It is known very well that you need to calculate market potential before you launch a product or a service. This article will help you determine 5 basic factors which can give you an idea of whether or not you have a good Market potential.

Market potential, quite simply, is the total demand for a product in a given business environment. So if you were going to write a book on business, you will check all the books written on business and the sales they had. That is your market potential. Off course, determining the actual values is very difficult and that is where you need to use various tips and tactics.

What Is Market Potential?

The market potential is an estimate of the maximum sales opportunity that a product or service may have in a target market. It’s an evaluation of the expected sales, given the customer base’s size and the product or service’s demand in the market.

This calculation allows businesses to realistically gauge the possible profitability and success of their offerings. Remember, the actual values can be challenging to determine, and this is where strategic planning and tactics come into play.

Why Is Market Potential Important?

To be a successful business, you need to plan your growth and investments according to the market potential. It gives you an idea of how much demand there is for your product or service in the market.

In addition, it can direct you toward areas where more customers are likely to be interested in your products or services. By understanding the size of the market, you can develop realistic goals for your product or service. You can also make decisions about how to allocate resources based on the potential market size and the potential revenue it may bring.

To get a better sense of the market potential, businesses should evaluate the growth rate in that particular market. This will provide an estimate for future sales and help with strategic planning. In addition, it’s important to understand the specific target market that you’re trying to reach. Knowing who your customers are and what their needs are can help to inform your decisions.

By taking all these factors into account, you can develop the right strategies and tactics for achieving the full potential of your market. It’s an essential part of business development and success.

Factors to Consider for Determining Market Potential

Let us go through the 5 elements important for calculating market potential –

1) Market Size

The first and most important factor to consider while determining market potential is the market size of your product. Market size is the total market sales potential of all companies put together. So if I planned on launching a new soap or Shampoo, then all the different companies such as HUL and P&G are my competitors. And the combined sales of soaps, including branded and non-branded products is my complete market size.

If you look at the consumer level, the market size is generally huge. Market size would be in Millions or billions too. But as you go down to the industrial level, Market size can be anything from a lakh to a thousand or even a hundred.

If you were a dealer of industrial ball bearings, then all the companies which are in manufacturing are potentially your customers. So if you find out the number of industries in your region, that is the ideal market size that you can target when launching a new Ball bearing product. Mind you, this is 100% market size. The market captured by you and who is going to be your future customer is a different story altogether.

The best way to get market size is to contact local research agencies if it is a small business. If it is a large business, it is better to take Market research data from companies like Nielson or IMRB. Determination of market size is the first step to determining market potential.

2) Market growth rate

The PC market as compared to the laptop market or the smartphone market is declining. So if you are a company that makes PCs, then you have to be aware that you are entering a declining market. Instead, if you have the potential, why not enter the Laptop market or the Smartphone market?

The ongoing trend in the industry is important as it can forecast the future of your product. Initially, books were all the rage, but now they have been replaced by Ebooks and there is hardly any need for physical books (though people still love to read them).

When you evaluate market growth rate, you have to forecast based on the differences between product line extensions and a completely new concept in the Market. Samsung has the Samsung Galaxy series which is a pioneer series in Samsung. Naturally, whenever a new product line extension of Samsung Galaxy is launched, it will sell in the market. But will a new product line sell at the same pace? So the Market growth rate is subjective and it depends on the type of product you are going to launch.

Market growth rate can be determined by checking the facts and figures of the last 5 years of the industry that you are in. Many top websites will give you such data. In fact, even newspapers do frequent analyses of which industries are growing and at what percentage. Today, if I were to enter the E-commerce industry, it will be a wise choice because the industry is growing by leaps and bounds. However, 10 years down the line, a new technology might be invented, which makes E-commerce buying obsolete.

3) Profitability

Going back to the E-commerce example, many small businesses have mixed feedback for E-commerce businesses. Some say that the market is huge and there is a lot of potential. But others say that they have suffered huge losses because of the amount of packaging and the transport costs involved in shipping across the country. These are both perspectives and both of them are correct.

Determining and forecasting your profitability is important to understand the market potential. If the business is going to give low profitability, then the volumes need to be high (ex – fmcg products) or if the business is going to give low volumes, then the profit needs to be higher (ex-industrial goods).

Calculation of profitability to determine Market potential can use three main elements

• ROI – Return on investment
• ROS – Return on sales
• RONA – Return on net assets
• ROCE – Return on capital employed

You can use any of the calculations mentioned above to calculate the likelihood of profitability and to determine how profitable the industry or product is going to be.

4) Competition

You need to know and understand the competition in an industry to determine the market potential for the product you are going to launch. If the industry has high competition, the entry barriers are going to be high and at the same time, establishing yourself will require deep pockets. You might have to lower the price of your products even though you are giving higher value. This requires that you have enough money to take hits till the time competition leaves the market.

This is exactly what happens when top brands enter industries that were dominated by Smaller players. Today, small retailers are suffering under the brunt of large multi-national sellers. Nonetheless, this does not mean small businesses have stopped establishing themselves. They are using different strategies to attract customers to their businesses. One such strategy is good customer service, which is missing in large corporations.

When competition is low, market awareness will be low as well. An example can be taken from industrial refrigeration products, where the competition is low, but the product knowledge is low as well. So your competitor is equally likely to influence the potential buyer as you are. Differentiation will be minimal because there is no need of investing in differentiation. In such a market, the companies which actually differentiate, literally dominate the market they are in.

Determining market potential requires you to understand the market standing of various competitors and it also requires that you have the necessary plans up your sleeves to understand how to tackle these competitors when the time comes.

5) Product and consumer type

Is your product a repeat buying product or a one-time sale only? In the above examples, Soap and shampoo is a repeat buying product. But once you buy a refrigerator, I doubt you will need another for the next 10 years. So in your whole lifetime, you will buy 8-10 refrigerators at the max. But in a year, you are likely to buy 40-50 soaps individually. That’s 300-400 soaps per individual in their livelihood. Multiply that by a billion and you can understand the market potential of the soap industry.

So how frequently is your product going to be bought again? Many toothpaste companies actively push the consumer to brush twice in a day. One of the reasons is that your teeth will be better. But another reason is that the toothpaste will be consumed faster and you will buy another toothpaste soon. Hence the push for brushing twice daily!!

Is your product completely new in the market? How likely is the customer to accept and adopt the same and what are the hurdles to be faced in product adoption? Can you forecast them right now? Because that will help in determining market potential.

The above 5 elements will give you a very good idea about the market potential of your product, irrespective of whether the product exists in the market or you are going to launch a new one. Remember – this does not apply to innovative products because the market size and growth rate of innovative products are unknown.

What is the Market Potential Analysis Formula?

For market potential calculation, you can use the formula –

Market Potential (MP) = N × MS × P × Q

Where-

• N = Total number of potential consumers
• MS = Market share (percent of consumers buying from you)
• P = Average selling price
• Q = Average annual consumption

To determine the market share, which represents the percentage of customers purchasing from your business, multiply the proportion of potential customers by the portion of the market your company aims to gain from competitors.

Example of Determining Market Potential

I want to launch a Chinese cuisine restaurant in my locality. So I determine the market potential as follows.

1. Market size – I have 2 lakh people living in my locality. They are of different demographics. But with some market research, I find out that many of them are young adults.

2. Market growth – As my region has even more apartments and buildings coming up, the market is going to grow instead of decreasing.

3. Profitability – I have an idea of the prices being kept by competitors, and at those prices, I will definitely earn a good margin

4. Competition – Strong competition from a local Chinese restaurant. But I believe my cook and experience is better than him when it comes to serving Chinese food.

5. Customer type – It is going to be a repeat business because customers who like my food are more likely to come again and again. Each customer will be important because I am in the food industry, and a single mistake can lose me a lot of customers as well as my reputation.

So, with the above analysis, I can safely say that I am better off with the launch of the restaurant and that the market potential exists. Similarly, you can perform a statistical analysis of the product or service which you are going to launch, and come to a decision with regard to the launch of the product.

How to Conduct a Market Potential Analysis

1) Conducting Customer Research

Conducting customer research involves understanding the needs, preferences, and behaviors of your target customers. This can include collecting data through surveys, interviews, focus groups, and even social media engagement. This crucial step allows you to tailor your product or service to meet the demands of your customer base, enhancing customer satisfaction and loyalty.

2) Analyzing Market Trends

Understanding current market trends is key to assessing market potential. You need to keep an eye on the latest developments in your industry, including new products, technologies, regulatory changes, and consumer behavior. This insight can inform your product development and marketing strategies, ensuring you stay competitive and relevant in your market.

3) Evaluating Competitive Landscape

An evaluation of the competitive landscape involves identifying your direct and indirect competitors and analyzing their products, marketing strategies, market share, strengths, and weaknesses. This knowledge allows you to differentiate your product, identify gaps in the market, and devise strategies to gain a competitive edge.

4) Assessing Market Size and Growth Rate

Assessing the market size and growth rate involves quantifying the number of potential customers and the rate at which the market is expanding or contracting. This information is vital for understanding the potential demand for your product and the scalability of your business.

5) Estimating Profit Potential

Finally, estimating profit potential involves analyzing the potential revenue and costs associated with your product or service. This includes considering the pricing strategy, cost of production, operating costs, and potential return on investment. This step is crucial for determining the financial viability of your product or service in the market.

FAQs

Q. What sets apart the potential market from market potential?

A. The potential market is the total number of people who could be interested in your product or service, while the market potential is the estimated profit that can be earned from a particular product or service.

Q. How do you determine the market potential?

A. To determine the market potential, you need to evaluate the competitive landscape, assess the size and growth rate of the market, and estimate your profit potential. Additionally, it’s important to consider factors such as customer needs and preferences, pricing strategies, cost of production, operating costs, and potential return on investment.

Q. What is the difference between sales potential and market potential?

A. Sales potential is the amount of revenue that can be generated from a particular product or service in a given market, while market potential is the estimated profit that can be earned from that same product or service. The two are related but distinct concepts.

Q. How market size and market potential are related?

A. The size of the market is an important factor in estimating market potential since it will determine how many customers are available for your business and how much revenue you can generate. Thus, larger markets typically have greater potential than smaller ones. Additionally, the growth rate of the market can also affect its potential for profit.

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