Published by MBA Skool Team, Last Updated: July 19, 2021
What is Potential Market?
Potential market is the part of the total population that has shown some level of interest in buying a particular product or service. This includes individuals, firms and organizations. Potential market is also called Total addressable market (TAM).
Based on the potential market, the manufacturers or marketers can plan for the budgets and expenses for production and other activities e.g. marketing, promotions etc.
The following figure depicts what is a potential market with respect to the total population and how it can be converted to a penetrated market:
The size of a potential market is found by performing a market forecast in which past trends and other parameters are analyzed to determine the TAM.
The size of a potential market helps a company understand the level of investment it should make further in the market, while taking into consideration other factors. If the potential market is very small, it means there is a very small fraction of the total population showing any interest in the product or category. This means that it is better that the company doesn’t invest further in the product or category because people won’t buy it.
If the size of the potential market is large, it means that there is a huge fraction of the total population which is showing interest in the product, so further investment can be made on the product development or modification, marketing, promotions etc. The size of the potential market gives an estimate of what all a company should do and how much it should invest.
Potential Market Example
For example, you want to calculate the potential market for laptops. For this, the entire population is divided into different segments which show interest in the product and then all the segments are added up. So, for laptops, the users who might be interested to buy are the students who are about to join residential campuses, students who simply want a laptop to differentiate it from the desktop at home, users of desktops who want to switch to a more portable version and office going people. The numbers in each of these segments of how many people are interested is found out through a market forecast and all the numbers are added up to get the size of the potential market.
Hence, this concludes the definition of Potential Market along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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