Market Potential - Explained
What is the Market Potential for a Business Idea?
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Table of ContentsWhat is Market Potential?Arriving at the Potential RevenueDiscounting Potential Revenue for PriorityExample of Calculating the Market Potential
What is Market Potential?
Generally, you will determine potential sales based on the market size and a reasonable percentage of the customers that you will serve. Most entrepreneurs are unrealistic in assuming the percentage of the market that they will be able to capture. They either overestimate the strength of demand, the number of interested individuals, or the strength and presence of competitors. When calculating potential profitability, take a conservative percentage (e.g., 1% or less) of the total market to estimate the number of sales.
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Arriving at the Potential Revenue
Once you have a conservative estimate for the number of customers or immediately-addressable market (IAM), you can arrive at projected revenue numbers by multiplying the IAM by the average price of the good across customer segments.
Discounting Potential Revenue for Priority
As discussed in a separate post, priority accounts for the eagerness of a customer to purchase the goods or services. Allocating a given level of priority to a product or service is a good way to discount the potential revenue from serving the IAM. If customers have an extremely high demand or priority for the item, then give it a factor or "1". This assumes that the customer will definitely purchase the product or service. If the demand for the product is medium to extremely low, give it a level of priority between ".6" and ".1". This indicates that anywhere from 10% to 60% of individuals will purchase the goods. If the demand for the good or service is recurring in multiple periods, then you can multiply the discount factor for the number of purchases by an individual customer. Multiply this factor times the potential revenue as a method of discounting your market potential.
Example of Calculating the Market Potential
Market size = 5,000,0000 Market capture = 1% or (.01) x 3 (The avg. number of purchase by a customer) Price = $50 Priority = .5
5,000,000 x .03 x $50 x .5 = $3,750,000
The formula demonstrates the market potential for the product or service within the given useful life or a product or service offered.