How to determine Market potential for any product or service?

Whenever we launch a new product or a service, we fear whether it has enough market potential. It is known very well that you need to calculate market potential before you launch a product or a service. This article will help you determine 5 basic factors which can give you an idea on whether or not you have a good Market potential.

Market potential, quite simply, is the total demand for a product in a given business environment. So if you were going to write a book on business, you will check all the books written on business and the sales they had. That is your market potential. Off course, determining the actual values are very difficult and that is where you need to use various tips and tactics.

Let us go through the 5 elements to determine market potential.

1) Market Size

The first and most important factor to consider while determining market potential is the market size of your product. Market size is the total market sales potential of all companies put together. So if i planned on launching a new soap or Shampoo, then all the different companies such as HUL and P&G are my competitors. And the combined sales of soaps, including branded and non branded products is my complete market size.

If you look at consumer level, the market size is generally huge. Market size would be in Millions or billions too. But as you go down to industrial level, Market size can be anything from a lakh to a thousand or even a hundred.

If you were a dealer of industrial ball bearings, then all the companies which are in manufacturing are potentially your customers. So if you find out the number of industries in your region, that is the ideal market size which you can target when launching a new Ball bearing product. Mind you, this is 100% market size. The market captured by you and who is going to be your future customer is a different story altogether.

The best way to get market size is to contact local research agencies if it is a small business. If it is a large business, it is better to take Market research data from companies like Nielson or IMRB. Determination of market size is the first step to determine market potential.

2) Market growth rate

The PC market as compared to the laptop market or the smartphone market is declining. So if you are a company which makes PC’s, then you have to be aware that you are entering an declining market. Instead, if you have the potential, why not enter the Laptop market or the Smartphone market.

The ongoing trend in the industry is important as it can forecase the future of your product. Initially, books were all the rage, but now they have been replaced by Ebooks and there is hardly any need for the physical books (though people still love to read them).

When you study market growth, you have to forecast based on the differences between product line extensions and a completely new concept in the Market. Samsung has the Samsung galaxy series which is a pioneer series in Samsung. Naturally, whenever a new product line extension of Samsung Galaxy is launched, it will sell in the market. But will a new product line sell at the same pace? So the Market growth rate is subjective and it depends on the type of product you are going to launch.

Market growth rate can be determined by checking the facts and figures of the last 5 years of the industry that you are in. Many top websites will give you such data. In fact, even newspapers do frequent analysis of which are the industries that are growing and at what percentage. Today, if i were to enter the E-commerce industry, it will be a wise choice because the industry is growing by leaps and bounds. However, 10 years down the line, a new technology might be invented, which makes E-commerce buying obsolete.

3) Profitability

Going back to the E-commerce example, many small businesses have a mixed feedback for E-commerce businesses. Some say that the market is huge and there is a lot of potential. But others say that they have suffered huge losses because of the amount of packaging and the transport costs involved for shipping across country. These are both perspectives and both of them are correct.

Determining and forecasting your profitability is important to understand the market potential. If the business is going to give low profitability, then the volumes need to be high (ex – fmcg products) or if the business is going to give low volumes, then the profit needs to be higher (ex – industrial goods).

Calculation of profitability to determine Market potential can use three main elements

• ROI – Return on investment
• ROS – Return on sales
• RONA – Return on net assets
• ROCE – Return on capital employed

You can use any of the calculations mentioned above to calculate the likelihood of profitability and to determine how profitable the industry or product is going to be.

4) Competition

You need to know and understand the competition in an industry to determine the market potential for the product you are going to launch. If the industry has high competition, the entry barriers are going to be high and at the same time, establishing yourself will require deep pockets. You might have to lower the price of your products even though you are giving higher value. This requires that you have enough money to take hits till the time competition leaves the market.

This is exactly what happens when top brands enter industries which were dominated by Smaller players. Today, small retailers are suffering under the brunt of large multi national sellers. Nonetheless, this does not mean small businesses have stopped establishing themselves. They are using different strategies to attract customers to their businesses. One such strategy is good customer service, which is missing in large corporations.

When competition is low, market awareness will be low as well. An example can be taken of industrial refrigeration products, where the competition is low, but the product knowledge is low as well. So your competitor is equally likely to influence the potential buyer as you are. Differentiation will be minimal because there is no need of investing in differentiation. In such a market, the companies which actually differentiate, literally dominate the market they are in.

Determining market potential requires you to understand the market standing of various competitors and it also requires that you have the necessary plans up your sleeves to understand how to tackle these competitors when the time comes.

5) Product and consumer type

Is your product a repeat buying product or one time sale only? In the above examples, Soap and shampoo is a repeat buying product. But once you buy a refrigerator, i doubt you will need another for the next 10 years. So in your whole lifetime, you will buy 8-10 refrigerators at the max. But in a year, you are likely to buy 40-50 soaps individually. That’s 300-400 soaps per individual in their livelihood. Multiply that by a billion and you can understand the market potential of the soap industry.

So how frequently is your product going to be bought again? Many toothpaste companies actively push the consumer to brush twice in a day. One of the reasons is that your teeth will be better. But another reason is that the toothpaste will be consumed faster and you will buy another toothpaste soon. Hence the push for brushing twice daily!!

Is your product completely new in the market? How likely is the customer to accept and adopt the same and what are the hurdles to be faced in product adoption? Can you forecast them right now? Because that will help in determining market potential.

The above 5 elements will give you a very good idea about the market potential of your product, irrespective of whether the product exists in the market or you are going to launch a new one. Remember – this does not apply to innovative products because the market size and growth rate of innovative products is unknown.

Example of Determining market potential

I want to launch a Chinese cuisine restaurant in my locality. So i determine the market potential as follows.

1. Market size – I have 2 lakh people living in my locality. They are of different demographies. But with some market research, i find out that many of them are young adults.
2. Market growth – As my region has even more apartments and buildings coming up, the market is going to grow instead of decreasing.
3. Profitability – I have an idea of the prices being kept by competitors, and at those prices, i will definitely earn a good margin
4. Competition – Strong competition from a local chinese restaurant. But i believe my cook and experience is better then him when it comes to serving chinese food.
5. Customer type – It is going to be a repeat business because customers who like my food are more likely to come again and again. Each customer will be important because i am in the food industry, and a single mistake can lose me a lot of customers as well as my reputation.

So, with the above analysis, i can safely say that i am better off with the launch of the restaurant and that the market potential exists. Similarly, you can perform a statistical analysis of your product or service which you are going to launch, and come to the decision with regards to the launch of the product.

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