Market potential

From CEOpedia | Management online

Market potential is defined as the maximum demand or high response for a particular group of customers in a specific geographic area for a given product or service expressed in a specific time and under specific conditions and competitive environment.

Factors on which the concept of market potential depends

  • Maximum response to demand under certain assumption, it means a significant boundary condition for the final demand.
  • The next condition on which the concept of market potential depends is a group of relevant consumers interested in a given product or service. It is important to focus not only on the current consumer but also pay attention to the potential consumer because the goal is to achieve maximum demand. The market potential can be diversified because everything depends on what group of customers will be the recipients.
  • The geographic area is the next factor that must be clearly defined, because it will relate to market potential. First of all, you should find and defined into mutually exclusive subsets of consumers, this is very important because thanks to this the management will be able to easily determine the sales department and control in various areas.
  • The important aspect is realizing that the concept of market potential is a clear knowledge of the product or service for which you need to determine and estimate the market potential. This is important when the product has its numerous substitutes, it is desirable to have market potential for the product class rather than the particular product.
  • The period in which the market potential will be estimated requires an earlier determination, it should be long enough to coincide with the planning periods in the enterprise. We can use both long and short periods, it all depends on the company.
  • The last factor influencing the potential of the market is useful to understand the environmental and competitive conditions relevant to a particular product or service, to investigate what the external environment may be, and to check the nature and scope of competition. This is important in estimating the potential of the market because the company has no influence on these factors.

Assessment of market potential

In order to properly assess the potential of the market, companies should estimate the number of potential customers and the number of products that will be able to buy. The calculations related to the number of potential clients may change due to the evolution of the life cycle or with possible evolution.

  1. Identification of probable market segments: a significant number of markets includes more than one segment. The task of the company is to predict which segments can evolve, additionally it should be taken into account that customers in a given segment will not buy every time.
  2. Estimation of the number of customers in a given segment: enterprises should estimate the potential number of customers who want to make purchases in the period for which they are looking for a market potential.
  3. Estimate the number of products customers will buy: The company estimates the number of products that customers are likely to purchase each segment during the period.

Market potential is an upper bound to actual sales, based on a set of assumption about future market condition. Market potential is important when contemplating entry in new markets.

Examples of Market potential

  • The potential for a new fast-food restaurant to open in a major metropolitan area is an example of market potential. The demand for fast-food restaurants in such an area is likely to be high and the competition for customers will be stiff.
  • The potential for a new organic food store to open in a rural area is an example of market potential. Although the population of the area may be small, there may be a demand for organic food products in the area that could be met by the new store.
  • The potential for a new luxury car dealership to open in an affluent suburb is an example of market potential. Although the population in the area may be small, the demand for luxury vehicles is likely to be high and the dealership could take advantage of this.
  • The potential for a new health club to open near a university is an example of market potential. The university population is likely to be a large group of potential customers and there is likely to be a demand for health and fitness services in the area.

Advantages of Market potential

Market potential provides valuable insights into the potential success of a product or service, allowing companies to make informed decisions about their investments and strategies. Advantages of market potential include:

  • Identifying untapped markets and potential customers. Market potential can help companies identify customer and market segments that they have not yet explored, as well as discover potential customers who have not yet been reached by their product or service.
  • Understanding competitive landscape. Market potential can help companies understand the competitive environment and identify competitive advantages that can help them gain a competitive edge.
  • Gauging customer demand. Market potential can help companies understand what customers are looking for and the demand for different products and services.
  • Identifying opportunities for growth. Market potential can help companies identify opportunities for growth and expansion in new markets.
  • Developing strategies and plans. Market potential can help companies develop strategies and plans to capitalize on new opportunities and maximize their investments.

Limitations of Market potential

The limitations of market potential include:

  • Market potential is difficult to accurately measure, as the demand for a product or service can change over time due to external factors such as competition or economic conditions.
  • Market potential can also be limited by geographic and demographic factors, such as the location of potential buyers, the availability of transportation, or the income levels of potential customers.
  • It is also difficult to predict the future potential demand for a product or service, as tastes, preferences, and trends change over time.
  • Market potential can also be affected by the availability of substitutes for the product or service, as well as the competitive environment in which the product or service operates.
  • Additionally, market potential can be limited by factors such as the size of the market, the level of market saturation, and the ability of the company to reach potential customers.

Other approaches related to Market potential

The following are other approaches to determining market potential:

  • Market research - Market research is a systematic process of gathering, recording, and analyzing data to understand customer behaviors and attitudes. It can be used to identify market opportunities and trends, and to measure customer satisfaction.
  • Market sizing - Market sizing involves analyzing the size of a given market and analyzing the data to determine the potential for growth.
  • Competitor analysis - Competitor analysis involves studying the competition in a given market to understand their strengths and weaknesses, as well as their strategies and tactics. This helps to identify opportunities for growth in the market.
  • Market segmentation - Market segmentation is the process of dividing a market into different groups based on characteristics such as age, gender, income, and location. By segmenting a market, companies can better target their products and services to meet the needs of specific customers.
  • Demand forecasting - Demand forecasting is the process of predicting future demand for a product or service by analyzing historical data. This helps companies plan for the future and adjust their strategies accordingly.

In summary, there are several approaches to determining market potential, including market research, market sizing, competitor analysis, market segmentation, and demand forecasting. By utilizing these approaches, companies can gain insights into their markets and identify opportunities for growth.


Market potential — recommended articles
Market attractiveness — Sales trend — Potential market — Business segment — SPACE method — Functions of portfolio — Key success factors — Sales potential — Analysis of customer

References

Author: Justyna Galon

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