Potential market: What is it and how is it calculated?

What is the potential market for a company or a product/service? How is it calculated? What is it for? In this article we talk about the importance of this estimate, which helps to determine whether or not it is worthwhile to introduce a given concept in a specific market.

What is the potential market?

The potential market or market potential is the maximum volume of sales – in physical units or monetary terms – that could be available to all companies in a given industry over a given period. Factors such as a specific level of marketing expenditure or environmental conditions must also be taken into account.

The estimation of the potential market is used by companies to make business decisions. On many occasions, different geographic areas are compared to see where it would be interesting to introduce a given product or service.

How to calculate the potential market?

To calculate the potential market it is necessary to take into account which segments compose it:

  • Available market: part of the potential market that has a strong motivation to purchase the product, sometimes a need.
  • Effective market: even more specific, these are the buyers in the available market who not only have a need, but are determined to buy it.
  • Target market: this is the objective market at which a company is aiming. That is, the sales objective that the company defines for a period of time. It is the smallest segment and includes buyers who are certain to purchase the product.

In many cases, calculating the potential market is complex and requires a demanding preliminary study. An example is when it is a new product or an item that is not yet marketed in that region. Here you can see our success case in identifying a new business opportunity in the beverage sector carried out by INFINITIA in which it was necessary to conduct market research and ethnographic techniques to identify users and understand the context of the sector.

Below, we will review a general formula for calculating the potential market, although in industrial or consumer markets other methods are often used, depending on the characteristics of the product or service to be introduced.

·     Market construction method (industrial markets)

Identification of potential buyers in each market and estimation of potential purchases for each. The success of this estimation depends on knowing the sector well and knowing how to identify potential buyers and their possible purchases.

·      Multifactor index method (consumer markets)

It is necessary to determine different variables to which a certain weight will be given. For example, depending on each product or service, the variable of competitors in the market or production costs in that particular territory can be added.

How to estimate the potential market?

The following formula is used to calculate the potential market: Q= n x p x q. In this formula, ‘n’ is the number of buyers, ‘p’ is the average price of that product or service and ‘q’ is the average per capita consumption. Depending on the estate or service being offered, these data will be more or less accurate, since for new products it is necessary to make estimates.

Potential Market Formula

Q= n x p x q

Q= Potential market

n= Number of buyers

p= Price

q= Per capita consumption

Example of an estimation of a potential market study

1. Target buyers

Let’s imagine that we are going to introduce a small household appliance in a country with a million inhabitants. Of course, not all of them would have the need or the capacity to buy it, so it is necessary to delimit. With the data from our research we will calculate what is the number of people we could sell to. Imagine that, after the study, it is determined that the number of potential buyers in that country is 50,000.

n= 50,000 buyers

2. Estimate the average price

Estimate the average price of the product or service you offer by analyzing the competition. In our example, the small household appliance is determined to cost 150 euros.

p= 150

If the decision is made to launch this product, it is necessary to carry out an economic feasibility study that allows you to propose a cost strategy that fits the users and the company.

3. Per capita consumption

Calculate the per capita consumption of your product in a given period. This will require a deeper analysis of the market to identify how many units of that product are purchased in a year. Let’s imagine that our product is 0.05 units per year.

q= 0,05

4. Estimate the potential market

Q= n x p x q

Q= 50.000 x 150 x 0,05 = 375.000 euros

In this example, we can see that the potential market is 375,000 euros. That is, it would be the amount that the company would achieve if the estimates are met. In this way, it is possible to make more accurate decisions about whether or not to apply a particular strategy in a new geographical area.

The analysis of the potential market: essential for the success of an idea

In most cases, having a good idea is not enough to succeed in today’s competitive market. Therefore, in order to start a business or launch a viable product, it is necessary to carry out a good analysis of the potential market. If you want to turn your concept into something tangible, our strategic design and prototyping team is the right one to help you make the best informed decisions. Can we help you?