An online platform selling vintage punk paraphernalia from the 1980s? A shop specializing in apparel made from deadstock fabrics? A dating app matching people by their preferred spice level? These business ideas may succeed … or may not. How can an ambitious entrepreneur determine which ideas have sales potential and which are better left in the Notes app?
A market potential analysis can help.
Learn what makes up market potential and how you can analyze your product’s potential market share with expert tips.
What is market potential?
Market potential is a business’s, app’s, product’s, or service’s estimated potential to make money. It answers the question: How much market demand is there for what I’m selling?
You can estimate your business’s market potential with a market potential analysis. It aims to estimate the number of people likely to purchase a new product or service, and the frequency of their purchases. Conducting a market potential analysis can’t predict the future with 100% accuracy, but the process can help gauge if your product launch or new business could be profitable.
Market potential formulas
Business owners, consultants, and marketing professionals all use various methods when determining market potential. Some go on “vibes” alone. Some use formulas to crunch the numbers.
The simplest equation for market potential multiplies the market size by the unit price of what you’re selling. Market size is estimated by taking the total number of potential consumers and subtracting factors that would hinder purchases.
A formula looks like this:
Market Potential = N × MS × P × Q
This equation uses the following variables:
- N (total number of potential consumers) is the total number of buyers for your product. It could be broad, like women between the ages of 18 and 60, or niche, like players of a specific video game.
- MS (market share) is the percent of potential consumers who buy from you rather than a competitor.
- P (average selling price) is what a customer would be charged for each unit, whether it’s an annual service fee or a one-off purchase.
- Q (average annual consumption) is an estimate of how many times per year a customer would purchase a product or service.
Most business owners want to make informed decisions about market potential. Some use a formula or take a broader analysis, identifying significant factors like competitors, specific market gaps, current trends, and economic environments to determine sales volume and potential markets.
The correct method depends on your company. A global company launching a new toothpaste for an international customer base will have a different method to calculate market potential than a local potato chip company introducing a new flavor to its regional market.
Factors that impact market potential
Several important factors impact the market potential of all businesses, products, or services, regardless of the sector:
- Competition. Oversaturated markets, sectors with many existing competitors, can heavily impact your market potential, especially if it includes large, cash-rich corporations.
- Trade regulations and taxes. Local, national and international laws, trade agreements, and tariffs affect your market potential and can change after elections, executive orders, and new legislation.
- Entry barriers. Barriers to entry include insufficient professional connections, inefficient supply chains, and lack of capital to cover production costs, equipment purchases, or staff.
- Market size. Niche products or services typically yield smaller market sizes, but can have an enthusiastic, loyal consumer base. Mainstream products and services appeal to larger market sizes, but consumers aren’t as loyal or devoted.
- Economy. Economic conditions are often in flux. Interest rates, unemployment rates, inflation and wage stagnation impact consumers’ perceived or actual desire to purchase particular products.
How to analyze your market potential
- Define potential customers
- Research competitors
- Understand external factors
- Stay up to date on trends
- Pair data with intuition
A market potential analysis can be time-consuming, but gaining a better idea of your potential markets and revenue is worth the effort.
Start with research to compile relevant data, which you’ll convert into useful information to gauge your business idea’s market potential. While data and research is necessary to understand where you fit in the marketplace, there is often a touch of founders’ intuition which factors into market research analyses.
1. Define potential consumers
You may broadly know who your target audience is, but understanding the details is crucial to understanding your market potential. A thorough analysis creates customer insights from purchasing history, habits, household income, and prevailing cultural norms, among other factors.
Petia Abdur-Razzaaq, founder and lead digital strategist at The Stylista Group, starts a market potential analysis using statistics, company and industry reports, and data on market sizes and trends. From there, she zeros in on her niche market sector and talks with customers directly or conducts consumer surveys.
“My clients tend to be niche,” she says of Brooklyn Made and Onea for Kids brands. “You know exactly what [their customers] look like from a demographic and psychographic interview.”
She also finds out where potential customers engage on social media, how new customers find a particular business, and what keeps current customers engaged.
Kat Kavner Woolf, the co-founder of Heyday Canning Co, emphasizes the importance of customer research, regardless of budget.
“We use Google Forms to make quick and scrappy surveys,” she says. “When we were first launching [Heyday Canning Co], we sent out a survey to friends of friends to try to gather insights to validate our thinking on the category. Now we use Google Forms to survey our existing consumers to better understand how and why they use our products, which has been super helpful.”
2. Research competitors
Analyze competitors to evaluate where your business, product, or service fits into the marketplace. Kat says she charts Heyday Canning’s competitors and competitive products along two related axes, allowing her to gain a bird’s-eye view of the landscape.
“I can map them out and start to see where the holes in the market are,” she says.
Giving an ice cream business as an example, Kat says one axis could be health-conscious to indulgent, the other, budget to premium, which helps to visualize any holes in the marketplace.
Petia identifies and monitors three to five direct competitors for her clients, noting that it’s important to differentiate between aspirational competitors (who the brand hopes to compete with) and real competitors (who they’re actually competing with).
“It makes sense to be as specific as possible,” she says. “If we can definitively say these three to five companies are direct competitors, this is where we want to be. That’s who we really want to take a close look at to see what they’re doing.”
3. Understand external factors
Many external factors, like a stock market dip or a recently shuttered supplier, are out of your control, but it’s wise to keep abreast of the news to make informed decisions about the future. Situations often change on a dime and can disrupt supply chains and distribution channels, requiring a pivot in business strategy. The COVID-19 pandemic, for example, limited the market potential for businesses like travel tour companies. At the same time, it exponentially expanded the total market size for virtual conferencing services like Zoom.
External factors that can affect your market potential include:
- Shifts in the political environment
- Policies, regulations, trade agreements, tariffs, or embargoes
- Natural disasters
- Economic downturns
- Technological advances
4. Stay up to date on trends
Social and cultural shifts—and even broad historical trends—can tremendously affect a product’s market potential. What’s fashionable one minute might be outdated and stale the next. Viral TikTok videos, for example, can drive a product into mainstream popularity—just look at the Swedish candy craze.
It is especially helpful to research consumer and cultural trends when launching a new product.
“For example,” Kat says, “if you were trying to understand whether to launch a milk alternative brand, I would go deep on understanding all of the consumer trends around plant-based, clean label, and specific nutritional attributes.”
Petia also highlights the ability of social listening tools to see the types of conversations that are happening online. She uses HootSuite, Brandwatch, Sprout Social, and Semrush to monitor online searches and social media activity.
“This gives you real-time data in terms of what consumers are actually looking for online, by search terms and by industry,” says Petia.
5. Pair data with intuition
Kat marries raw market growth rate data with her own intuition to determine a new product’s overall market potential.
“I start with my own hypotheses and then dig for data to support or reject that hypothesis,” she says. “I dig deep to find free sources of data to get a sense of whether the market is growing or declining, and then go a layer deeper to determine which brands in the market are growing or declining.”
Free data sources for a public company’s stock price history include the NYSE or Nasdaq. Google Trends and Exploding Topics are useful tools for keeping up with trending topics. Statista, McKinsey, Neilson and SPINS also produce relevant data and reports for market potential analysis in the consumer packaged goods (CPG) industry. Kat considers these the ultimate tools for understanding what people are buying.
While the science part of Heyday’s potential market analysis involves reports and collecting data and numbers, the analysis is an art. Kat describes the process as taking in the information and following your gut instincts on where things are heading, considering what people need that they don’t currently have.
“We have never relied on formal consumer insight work,” she says. “I have always found this more informal blend of art and science to work quite well.”
Market potential FAQ
What platforms help define the market potential of a business, product, or service?
Google Trends and Exploding Topics are free tools to help understand your market potential. Subscription services like HootSuite, Brandwatch, Sprout Social and Semrush also provide valuable data to inform your analysis.
How do you determine market potential?
Determine your market potential by researching, compiling, and analyzing data on the target customer base, competing businesses, industry trends, and other external factors.
How accurate are market potential calculations?
Conducting a market potential analysis can’t predict the future with 100% accuracy, but the process can help you gauge whether your product launch or new business could be profitable.
