Potential market

From CEOpedia | Management online

Potential market, Total Addressable Market (TAM) - is a set of consumers who have a significant interest in a particular product or service that is a subject of a given market offer. It inform how big is the largest possible market in reference to available revenue opportunity. Potential market's size helps to understand possible level of investment in the market and shows business opportunities. If the size of potential market is small then simultaneously total population showing interest in the product is small fraction what means that the investment has little chance of success because people won't buy it. If the potential market is large, then fraction of the total population showing interest in the product is big, so investing in development or modification of the product, marketing, promotions etc. can be made. Knowing the size of potential market it is possible to estimate of what steps the company should take and how much it should invest. Potential market based on a set of assumption inform about upper bound to actual sales. Potential market the first and key point to consider entering a new markets.

Estimating Market Potential

The total market potential is calculated by multiplying the number of possible buyers by the by the average selling price of one unit of the product by the quantity purchased by the average buyer. However, the more information is entered into this formula, the better the market potential can be assessed.

Formula: PM = B x S x C

  • PM = market potential
  • B = number of possible buyers
  • S = average selling price
  • C = average annual consumption

For example, if for a particular product there are 10 million potential buyers in the market and the average buyer purchase ten units each year at a price of two dollars per unit, the total market potential for that product for the year is 200 million. Total market potential can be expressed in dollars or units.

TAM as a subset of a market

The following acronyms: TAM, SAM and SOM represent different subsets of the market, where each successive will reflect on a part of the previous one. These terms are often referred to during the market evaluation.

  • TAM (Total Available Market, Total Addressable Market) - is the entire market demand for a product or service. Applies to the entire market - assuming that company would have 100 percent shares in market. Thanks to this, you will estimate the size of the total market. Simly, it's a collection that contains subsets SAM and SOM and provides an introduction to further analysis.
  • SAM ( Serviceable Available/Addressable Market) also reachable market - is a part of the TAM and showed what part of this market may be available to a company, be served by it, taking into account the geographical factor.
  • SOM (Serviceable Obtainable Market, Share Of Market) - is the portion of SAM which can be reached with high possibility. The most important analysis, because it gives a realistic insight into how many customers is possible to actually get.

Examples of Potential market

  • Automotive industry - The automotive industry is one of the largest potential markets. The industry is worth over $1 trillion and is comprised of a wide range of vehicles and components. The automotive industry includes cars, trucks, buses, motorcycles, and other forms of transportation. It also includes parts and components such as tires, radio systems, and engines. The automotive industry is highly competitive, with companies competing for market share.
  • Pharmaceutical industry - The pharmaceutical industry is one of the largest potential markets in the world. It is estimated that the global pharmaceutical market is worth over $1 trillion and is expected to grow at a rate of 6.5% annually. The industry is highly competitive, with companies competing for market share and innovation. The industry produces a wide range of drugs and other products, such as vaccines, over-the-counter medicines, and medical devices.
  • Technology industry - The technology industry is one of the largest potential markets in the world. It is estimated that the global technology market is worth over $3 trillion and is expected to grow at a rate of 5.5% annually. The industry includes a wide range of products and services, such as computers, software, electronics, and telecommunications. The technology industry is highly competitive, with companies competing for market share and innovation.

Advantages of Potential market

Potential market provides the basis for assessing the potential size of a market and the benefits of entering that market. It helps to identify business opportunities, inform of the investment to be made and understand the upper bounds of actual sales. The following are the advantages of potential market:

  • It allows the businesses to identify the segments of population that could be interested in the product or service and estimate the size of the market.
  • It helps to understand the competition in the market and the competitors’ strategies.
  • It helps to identify the target market and focus on it.
  • It helps to identify the most profitable market for a product or service.
  • It helps to understand the potential demand for the product or service.
  • It helps to estimate the potential return on investment.
  • It helps to understand the upper bounds of actual sales.

Limitations of Potential market

Potential market does not always provide an accurate representation of the market, and it has several limitations. These include:

  • It is based on assumptions, which can be inaccurate. Potential markets are often based on assumptions about future trends and consumer preferences, which can be off the mark, leading to an overestimation or underestimation of the size of the market.
  • It is difficult to measure accurately. Potential markets are often based on a combination of market research and expert opinion, which can be difficult to measure accurately.
  • It can be time-consuming. Potential markets require a significant amount of research and analysis, which can be time-consuming and expensive.
  • It can be costly. Market research and analysis can be costly, and the results may not be accurate.
  • It can be difficult to predict. Potential markets can be difficult to predict, as consumer preferences and trends can change quickly.

Other approaches related to Potential market

  • Market Segmentation - is the process of dividing a market into distinct groups of buyers who have similar needs and characteristics. It helps companies to better understand their target customers, develop products and services that meets customer needs and communicate with them in more effective way.
  • Competitive Analysis - is the process of evaluating the strengths and weaknesses of current and potential competitors. It helps to identify competitors, their individual strategies and how companies compare to each other. It provides insights into current and potential competitors’ capabilities and performance in the market.
  • Product Positioning - is the process of positioning a product in the mind of the customers, by emphasizing the benefits and attributes of the product. It helps to differentiate products from the competition and develop a unique identity in the market.
  • Market Research - is the process of gathering and analyzing information about customers, competitors and the market. It helps companies to understand the needs of their customers and the competitive environment.

In summary, other approaches related to Potential market include Market Segmentation, Competitive Analysis, Product Positioning and Market Research. These approaches provide more insights into the potential market, helping companies to identify their target customers, differentiate their products from the competition and understand the needs of their customers.


Potential market — recommended articles
Product competitors — Market attractiveness — Market potential — Method of calculating the BCG matrix — Market metrics — Sales trend — Competitor — Capture rate — Map of strategic groups

References

Author: Anna Stankowska

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