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GuidesMarket researchA beginner's guide to market potential

A beginner's guide to market potential

Last updated

8 May 2023

Reviewed by

Hugh Good

A great idea doesn't necessarily translate into millions in sales. If you're launching a company or a new product, you need to know if your products or services are something consumers will need or want.

Producing and marketing any product is an expensive endeavor that requires well-informed decisions if you hope to become profitable. Understanding the market potential of your business, product, or service is the first step to determining the potential value of your million-dollar idea. 

Don't panic if this is your first introduction to market potential or if you only have a vague concept of what it means. We're here to unpack exactly what market potential is, what factors to consider, and how to calculate a market potential analysis. We also answered frequently asked questions to clarify any confusion around similar market analysis terms.

What is market potential?

In the most basic sense, market potential is an optimistic projection of how much you can earn from your product based on the number of consumers who could possibly be interested in what you have to offer. It is an estimate derived from multiplying the price of your product by your entire user market. 

Since attracting every possible customer is unlikely, certain factors are considered to calculate a more accurate portrayal of your potential earnings.

To determine the market potential of a product or service, you'll need to develop a clear picture of the market size, factors that affect the current market, growth potential, and external influences. Certain unique factors about your product will come into play, and the costs required to develop the product will also be a consideration.

The importance of market potential

Successful businesses and product launches are not built on innovation alone. A company or entrepreneur can develop a product that serves its intended purpose but still never becomes profitable. To avoid wasting time and money, a business must evaluate the potential returns a product or service will produce.

Market potential analysis helps you learn more about your target audience, so you can decide whether to turn an idea into a new revenue stream. As you work through the process, you might learn valuable information about fine-tuning your product for improved results or reasons to go in a different direction.

Calculating market potential gives you the hard data you need to determine whether your product or service will likely be viable in the current and future market.

Market potential formula

Market potential is calculated by using a simple mathematical equation. Before you use the formula, you'll need to have a price point in mind for your product and identify the market size.

We mentioned that market potential is an optimistic outlook for your potential sales. You'll see this evidenced further in the basic formula used for the calculation. To determine market potential, you simply need to multiply the market size (number of people who could become users) by your unit price. 

Market potential = Market size x unit price

However, it's important to keep in mind that this formula suggests that all potential customers will purchase your product. When you run your complete analysis, specific factors will be applied that narrow your market. 

Example of market potential calculation

Let's say you've developed a fitness app to help seniors track exercise. It's voice-activated for convenience and automatically supplies relevant recommendations based on user preference and activity level.

To apply the market potential formula, you determine that 34% of adults over 50 have used an app for exercise.

Since there are approximately 108.7 million adults over 50 in the US, you set your market size at 36,720,000 (rounding down to 36 million, for simplicity’s sake). You've determined your market size to be all American adults over 50 who have used an app to track fitness.

If every potential customer downloaded the app at a cost of $10, your revenue would amount to $360 million (36M sales x $10 unit price).

While you can't expect to attract every adult over 50 to use a fitness app, this figure gives you a starting point for figuring out your market potential.

Factors for calculating market potential

Now that you've generated an indication of what your market potential looks like, you can consider the factors that will further refine your market. These are the factors that will affect your real-world market potential.

  • The total size of the market — The total number of customers that could be interested in your particular product or service. In our example, it was the number of adults over 50 who use fitness apps.

  • Return on investment (ROI) — Is the market viable enough to invest in? In other words, will the market size provide you with enough profits to generate returns greater than your investment in the product?

  • Competition within the category How many competitors already produce a similar product or service? Is the market saturated with similar products that already address the pain points solved by your solution?

  • Entry barriers — Are there any factors that make it especially challenging to enter your chosen market? For example, license costs, federal regulations, or large operational costs might be an issue.

  • Political environment — If you're considering international sales, the political environment can limit potential sales. Supply chains affected by international shipping can also be a concern.

  • Internal environment Even if the market potential is promising, your strength in the market can be questionable. Do you have the resources to compete in the market at a suitable cost with an attractive offering?

How to conduct a market potential analysis

Here's where we get to the fun part. You've learned all the factors that can influence your market potential. Now, you can plug in relevant data to get a real sense of your market potential. These steps will help you generate an indicative picture of how your product is likely to perform in the market.

By taking all relevant factors into consideration, you can get a more accurate estimate of the market potential of your planned product or service.

Identify market size and demand

We discussed how market size describes your potential customer base, but we will consider the factors likely to narrow your customer base. 

Our example began with the number of Americans over 50. We narrowed that number down by nearly two-thirds by taking into account how many seniors never use fitness apps. Yet, even after reducing the original population from over 100 million to 36 million, there are still other factors to consider. 

Here, the number of current users who may not want to switch to a new product will likely be relevant. Research shows that 45% of seniors are uncomfortable trying new things and therefore may be reluctant to incorporate your innovation into their routines.

To determine accurate market size, you'll need to consider how age groups, pricing, and other behavior may affect the interest of individuals in your target market. Research will be required to get a firm understanding of what conditions are most likely to affect your target customers' buying choices.

Examine the competition

Competitors already occupy part of the potential market. These are companies that offer similar products to the same target audience.

To accurately analyze the competition, you'll need to research companies with similar products and see if these products address the same need. You'll also need to evaluate customer loyalty and consider whether consumers will change brands.

Different factors affect customer loyalty in various demographics. Social and economic shifts can also impact customer loyalty. Some research may be required to get an accurate portrayal of customer loyalty in your chosen industry.

Evaluate market growth rate

You already have a firm understanding of the current market for your product. You've considered that the market is large enough to offer ROI. Now, you can determine if the market is growing. Market growth provides you with additional opportunities to attract customers who aren't already in the market. 

To understand market growth, you want to analyze trends and determine how the market has changed over the past few years. Consider economic or cultural shifts that might increase market growth. For instance, technology use and digital transformation grew exponentially during pandemic restrictions. As a result, many consumers are more comfortable using digital products.

Specific features about your product may also impact potential growth. Consider how our example is designed to improve convenience.

Maybe you created such a product because your grandmother prefers not to use complex digital products. Your new app will address her pain points. It also has the potential to address the pain points of the 14% of older adults who are uncomfortable with technology.

Calculate profitability

Now that you've narrowed down your market to a more accurate estimate, you need to determine whether you can still achieve profitability. Evaluate production costs, breaking into the market, advertising, and your intended price. Consider export laws, special taxes, legal fees, and administrative expenses.

Once you have a complete cost estimate, consider your potential ROI. Will you need to adjust your price level to break even? If you do, will your product still be competitive in the market?

Take a moment to consider what type of product you're offering. Is it a one-time offering or something that will generate repeat purchases? Demand over time will increase your purchase rate and improve your potential ROI.

Consider external influences

All the data you've considered so far has been based on internal market factors. Yet, external factors have a major impact on any marketable product. Social, economic, and political changes can affect your ability to supply products in a specific market.

Consider how new government regulations can impact costs and supply chain timelines. External factors can also significantly impact demand. For example, an expensive luxury item might not generate the expected consumer interest during a recession.

Do your research to get a better idea about which external factors are likely to affect your market. Examine historical trends that have previously affected the market and consider future predictions in your industry.

FAQs

What is the difference between potential market and market potential?

The potential market is the population who is interested in the product or service you're offering. Market potential is an estimation of the potential sales revenue from all supplying channels in a market. In other words, the potential market describes a group of people, while market potential describes the potential value of a product.

What is the difference between target market and potential market?

The potential market is the total audience who could potentially be interested in using your product. Before considering all the factors influencing consumer choices, a potential market can encompass an entire gender or age group.

The target market is the audience most likely to be interested in your product despite competition and other factors that impact demand.

What is the difference between market size and market potential?

Market potential is the possible money-making capability of a business, product, or service. Market size is more closely aligned with the potential market. It is the group of people who are most likely to be interested in your product or service. Market size is one of the factors used to calculate market potential.

What are sales potential and market potential?

Sales potential is similar to market potential. However, it has a narrower focus.

Market potential describes the maximum amount of sales that could occur within a product category. 

Sales potential factors in the market share and product performance to represent an accurate estimation of the number of sales a company can expect to bring in within a specific time frame. Sales potential represents product sales within your company within a given time frame.

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