There are a lot of decisions that go into launching a new product or service. You have to come up with the concept, define your target market, decide where you’d want to sell that product, and test your positioning, marketing, branding, pricing, packaging, and more.
But if you’re launching a product in a brand new market, or launching a new type of product in a market you already sell in, you’ll need to assess its market potential before launch. Forecasting the success of your product by analyzing market potential helps you decide whether or not the product is worth the investment, and if so, how to approach the marketing of your new product.
What is market potential?
Determining the market potential for a productor service tells you what the market is really worth by helping you calculate the total demand for a product in a certain business environment. It tells you the total number of people (or businesses) that you could ever possibly sell to, also known as your sample size, which can help you calculate your revenue potential.
It doesn’t help you predict the future, but it does help you predict whether or not your product has a shot at success. Market potential answers the question, “How much could we sell?” It’s commonly used to estimate whether or not expansion into new markets is feasible (for example, if you’re considering expanding sales into a brand new U.S. territory you’ve never sold to before).
Potential markets take one of a few forms:
● New products you market to your current customers
● New products you market to new customers
● Current products you market to new customers
You probably won’t (and shouldn’t) expand into multiple new markets at once, but understanding your options can help you decide which new markets make the most sense for your business goals.
Use cases for market potential analyses
Here are a few examples of situations in which a company would want to perform a market potential analysis before moving forward on a new initiative:
- A sustainable athleisure brand that creates clothing out of recycled products is interested in expanding its clothing options to include sleepwear and day-to-day basis. They’ll need to determine their market potential for these new clothing verticals and see if it’s something existing and new customers would want to buy.
- A skincare brand wants to branch out into makeup and beauty products. In an industry as heavily saturated as the beauty industry, a market potential analysis can be a valuable tool to determine whether or not that will be a profitable decision.
- A rideshare company that launched in Chicago is testing out new geographic markets. They can determine the market potential of new territories to determine which other cities make sense for the next phase of their expansion.
- A manufacturing company that sells products through a network of authorized distributors is exploring the possibility of launching a direct-to-consumer channel. They’ll need to determine the market potential of their product and the implications of a distribution channel change before moving forward.
Determining market potential
So how do you determine market potential? There are a few factors to consider:
- Market Size: This is the first and most important factor. Market size is the total market sales potential of every company in a market combined. If you’re launching a new skincare brand, the market size would include the combined sales of every other skincare brand, both branded and non-branded, in your geographic territory. This is also known as your Total Addressable Market (TAM). Your TAM is generally a huge number (depending on what you’re selling) but not everyone in the TAM will fit your customer profile. Depending on the size of your industry, you can consult companies like Nielsen to get accurate market size data.
- Market Growth Rate: Is the market you’re entering (or already selling in) growing or declining? When you check the last 5-10 years of sales data for your industry, what patterns do you see? By using this data, you can forecast whether or not the market size will change and use that to shape your predictions.
- Profitability: What’s your likelihood of profitability? How profitable, generally, is the market you’re entering? Lower profitability markets require higher sales volumes, while higher profitability markets can get away with lower sales volumes.
- Competitive Analysis: Who are you competing against in the market? Which companies are selling similar products, or might in the future? How much market share do they have? What advantages and disadvantages do you hold over them? If you’re entering a market where one or two companies monopolize most of the market share, you’ll be at a much greater risk of vulnerability. Knowing your existing (or potential) competition helps you plan better for the future.
- Product and Consumer Type: What type of product or service will you be selling? Is it a one-time purchase (like a high-end piece of furniture) or a repeat purchase (like toothpaste)? Is it a product or service consumers are already familiar with, or will you need to invest in consumer education to boost product adoption?
- Distribution Channels: How will you distribute your product? Will you sell directly to consumers or use distribution channels? Will you white label your products and distribute them through a network of resellers? Distribution channels can affect revenue and expenses, which will affect your revenue forecasts.
Analyzing each of these factors can help you accurately assess the potential of a new market. You may be able to look at your own historical sales data for answers, or you may have to consult outside organizations like consumer research publications, consultancies, or other third parties. It’s important to fully consider every factor for a well-rounded view of your market potential; this will give you the best shot at success by showing you areas of risk and opportunity.
What is the market potential analysis formula?
NC State University distills market potential down into the following formula:
Estimating Market Potential MP = N × MS × P × Q
The formulaic elements are:
● MP = market potential
● N = total number of potential consumers
● MS = market share (percent of consumers buying from you)
● P = average selling price
● Q = average annual consumption
To calculate the market share (the percent of consumers buying from you), multiply the percentage of consumers who are potential customers by the percentage of the market the client expects to capture from competitors.
Honing in on your potential markets
Market potential tells you the total number of people/businesses that could buy your product or service. But remember: just because someone could buy your product doesn’t mean you should invest valuable time and resources in marketing to them.
You’ll need to spend time on additional market research to narrow down your target market and create a marketing plan that’s a bit more sustainable than marketing to every single person who could ever buy what you’re selling. This is where customer research comes into play—focus groups, customer interviews, and other strategies that will give you a better idea of what demographic or geographic segments are the best fit for what you’re selling.
Conducting customer research helps you evaluate where you have the most opportunity in your market. You can use that research to define a market segment of people who are most likely to buy from you. Generally, you would use demographic data to describe this segment, including:
● Marital Status
● Household Income
You can use demographic data alongside behavioral data to paint a rich picture of your ideal customer. Maybe you already know that most of your existing customers are young families with a household income above $150,000 who live in urban areas. They’re college-educated and like to do a lot of research before making a large purchase. Knowing this, you can carve out a smaller section of your total market size and allocate your marketing dollars more efficiently when entering new markets.
How accurate are market potential calculations?
It’s important to remember that any marketing potential analysis is only as accurate as the assumptions you make, the data you use and the market analysis tools you're using. When you calculate market potential, it’s generally recommended that you’ll be better off estimating on the lower side of potential revenue and setting your prices to cover your costs.
If your estimates are lower than the actual revenue, you’ll drive additional profit. If, however, your estimates are too high, you may find yourself struggling to cover costs.
Unlock your full market potential
Determining market potential can help you determine who to market to, when the best time to scale is, and where you have opportunities for additional growth. Finding and aligning on the right data for these analyses can be more difficult than it seems, especially if you don’t have a clear framework.
Starlight Analytics has a team of seasoned product experts that power winning products across all major industries. We’ll equip you with high-quality, easily digestible insights and actionable takeaways that are practical and considerate of your business strategy. We can even help you uncover product whitespace and new market opportunities by identifying unmet customer needs and emerging conversations.
Together, we’ll review the output and work to prioritize which ideas have the potential to influence your product roadmap. Want to learn more? Click here to share more about your goals and get started.