POTENTIAL MARKET: CHARACTERISTICS, HOW TO CALCULATE IT, EXAMPLES - ECONOMY - 2025

The potential market is the part of the market that can be captured in the future. It includes all the people who are not buying from the company today, but who could potentially become customers.

These individuals may purchase new products that the company has not yet made, or they may purchase products that the company will improve or market more effectively later.

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It is the most important part of the future growth of a company. The potential market will be the group of consumers who express a certain level of interest in a market offer. It is the total size of the market for a product at a specific time.

Keep in mind that the potential market is just a photograph in time. It is a fluid number that changes with the economic environment.

For example, increasing or decreasing interest rates will affect the demand for products that are generally financed, such as cars and houses.

Focus on the future

You may be very happy with your sales and performance today, but that doesn't mean you have enough potential markets for the future.

This can be changed by making the decision to focus on the potential market of the business. By focusing on the potential market, you are not increasing your market share for today. It is being ensured that the market share will increase for the future.

characteristics

The potential market is an estimate of the maximum sales of a product or service. It is a somewhat imaginary estimate, as it assumes that the entire market for a product can be captured. However, it can be a useful reference.

Represents the upper limits of the market for a product. It is generally measured by the value of sales or by the volume of sales. For example, the potential market for ten-speed bicycles may be worth $ 5,000,000 in annual sales.

On the other hand, the potential market for motorcycles can be 500,000 units per year, which is a measure of sales volume rather than sales value.

Types

There are infinite types of potential markets. You will find one every time you find a new type of customer you want to sell to, and make sure you have thought of all of them before moving on.

Although you have to focus on the largest groups, you will also seek to catch the smallest.

ID

Look for people of a certain age and socioeconomic status to examine their specific needs.

You can look to expand the groups of people you are already selling to, or find a new group of customers that has never been considered before.

For example, a company that only sells to the 35-55 age group may start selling to the 18-34 age group with a new or updated product.

Reach the potential market

Once the potential market has been identified, the key will be to send the right message to the right person, at the right time. You will also need to identify how you can create a connection with them.

Keeping these two things in mind, the message and how to create a connection, you must tailor your marketing to that potential market. It is required to use not only the correct message, but also the right marketing channels and media.

Taking advantage of potential new markets requires a lot of planning and thoroughness.

What is the use of knowing it?

The potential market is something that can be expected in the future, and it is a market that will surely make money in the future if the company focuses on it.

However, you cannot make money without an address, and therefore you will have to think a lot about this market.

Setting new goals for the future is essential. The company could settle on current sales, but that does nothing for the future. Understanding the potential market shows that you have a future.

Potential market size

The size of the potential market helps the company understand the level of investment it should make in the market, while taking other factors into account.

The size of the potential market provides an estimate of what a business should do and how much it should invest.

If the potential market is very small, it means that there is a very small portion of the total population that shows interest in the product or category. This indicates that the company would be better off not investing more in the product or category, because people will not buy it.

If the size of the potential market is large, it means that there is a large part of the population that shows interest in the product, so a greater investment can be made in the development or modification of the product, marketing, promotions, etc.

How to calculate it?

Determining the potential market for a product is part of a successful marketing process and requires market research.

The factors that will determine whether the potential market for the product is worth the investment should be examined.

Size of the market

It is the first factor to consider in determining the potential market. This is the potential sales market for all companies together.

If a new soap is planned, then companies like HUL and P&G are the competitors. Soap sales, combining brand name with non-brand, will be the full size of the market.

At the consumer level, the size of the market is huge. It would be millions or even hundreds of millions. By descending to the industrial level, the size of the market can be reduced to thousands.

The best way to get the size of the market is by contacting local research agencies, if you are a small business. For a big business, it is better to hire market research from high-level companies.

Growth rate

It can be determined by checking the figures for the last five years for the industry you are in.

Many of the major websites will provide such information. Even the newspapers frequently analyze which industries are growing and by what percentage.

The current trend in the industry is important, as the future of the product can be foreseen.

Cost effectiveness

It is important to determine and forecast profitability to understand the potential market.

If the business is going to give low profitability, then the volumes must be high. If the business is going to have low volumes, then the profit must be high.

The profitability calculation to determine the potential market can use the following indicators: return on investment and return on sales.

Competition

The competition must be known to determine the potential market for the product to be launched.

If the industry has a lot of competition, the barriers to entry will be high. Likewise, establishing itself will require large resources. Products may have to be lowered despite offering higher value.

Determining the potential market requires knowing the market position of the different competitors and also requires having the necessary plans to understand how to deal with these competitors when the time comes.

Analysis of potential clients

The size and demographics of potential consumers must be determined.

The information to be obtained includes the size of the target market population, their product preferences, and average annual household income. This will indicate the number of potential customers and if they can actually afford the product.

You can assess this customer base by looking at existing or secondary data, such as demographic data collected by the census bureau, on household demographics.

You can also decide to collect primary data, which is specific data to analyze the potential market for the product.

Among the primary data collection means are telephone surveys, using a random sample of households that consider themselves part of the target market.

Examples

Industry

The size of an industry, such as fast food. This type of estimate tends to be accurate, as governments and industry associations can publish relevant data.

Target market

Estimation of the potential market for a product with a specific target market, based on factors such as price, lifestyle, or demographics. For example, the size of the market for children's snowboard boots.

Distribution

The scope of the distribution channels is taken into account. For example, if snowboard boots are sold in Canada and Europe, the size of these markets can be estimated. This is also known as available useful market.

Determination of the potential market

They want to launch a Chinese cuisine restaurant in the town. The potential market is determined as follows.

Size of the market

There are 2 thousand people living in the town. They are from different demographics. Some market research reveals that many of them are young adults.

Market growth

As the region has more apartments and buildings to come, the market will grow rather than shrink.

Cost effectiveness

You have an idea of ​​the prices that your competitors are keeping, and at those prices you can definitely earn a good margin.

Competition

There is strong competition from local Chinese restaurants. However, the cook and experience are thought to be better than the competition when it comes to serving Chinese food.

Customer type

It's going to be a recurring business, because customers who like food are more likely to come over and over again.

Every customer will be important, because in the food industry with just one mistake many customers and reputation can be lost.

References

1. The Balance Small Business (2018). Identifying Opportunity in New Potential Markets. Taken from: thebalancesmb.com.
2. Study (2018). Market Potential of a Product: Definition & Analysis Example. Taken from: study.com.
3. Mba Skool (2018). Potential Market. Taken from: mbaskool.com.
4. John Spacey (2017). 5 Examples of Market Potential. Taken from: simplicable.com.
5. Hitesh Bhasin (2018). How to determine Market potential for any product or service? Marketing91. Taken from: marketing91.com.
6. Tim Berry (2013). When, Why, and How to Calculate Potential Market. US Small Business Administration. Taken from: sba.gov.