Market Potential - Definition, Importance, Factors & Example
Published in Marketing and Strategy Terms by MBA Skool Team
What is Market Potential?
Market potential is the valuation of the sales revenue from all the supplying channels in a market. Market potential is the population that is interested in the product/ service that is being made or offered by an organization. In other words, market potential is the potential money making capability of a firm if it capitalizes all advantages and everything goes its way. It is usually measured in sales units/sales volume or the potential revenue.
Importance of Market Potential
It is very important for a new business to know and determine the market potential of the product of service being offered. If the market potential is very low then there is no point spending a lot of money on the product. One of the most important aspects of market potential is the amount of business a product can generate in future as compared to today. Companies can also evaluate the market share of companies in the market.
The most relevant question is the target market growing for the offering. Market potential helps business plan better and launch their products and services with better preparation. Depending upon the overall market potential, companies can identify the sales potential, or the amount of sales they would be doing in that identified market.
It is a subset of the total population, where market potential is the population, all of whom can be potential consumers of the product or service. Market potential is the maximum population which would be interested in the product / service, and gives a good insight on the growth possibility as well.
Total market potential can be calculated in terms of units or money.
Factors for calculating Market Potential
There are various factors which are important for knowing the actual market potential:
1. Total Size of the Market
This means the total value of customers or clients for the particular offering. higher the number better it is.
2. Return on Investment
This would mean is the market profitable to invest in? A market which would give a good return on the costs incurred would only lead to good business today as well as in future.
3. Growth Rate of the Market
A target market may be good today in terms of size and ROI but is it going to be rising in future as well? Hence the growth rate and trends are very important for determining the market potential
4. Category Competition
How many and how big are the competitors for our product/service? The competition would determine on the market potential. More would be the number of competitors, less would be the share the new organization would be able to take.
5. Entry Barriers
Are there any real barriers to entry into the existing market? e.g. Very high licence cost can be an issue or large operational or setup cost can also be an entry barrier.
6. Political Environment
In international markets, the political environment forms a very important factor in determining the market potential.
7. Internal Environment
Overall the market potential may be very good but the question arises that are we strong enough to compete in the market with suitable offering, cost, competition.
Market Potential Example
Let us say we need to see what is market potential of a tablet PC which has to be launched in a geography. It will depend on how many tech savvy individuals are there in the geography. It will depend on the overall population of that region. The other factor can be are tablet PCs already available in the market through existing competitors.
The features of those tablet PCs would be critical in determining the market potential. Eventually based on multiple factors, it can be determined for example that 10000 tablet PCs would be sold in the year which can be 10,000,000$ given price of each tablet is 1000$.
Hence, this concludes the definition of Market Potential 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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