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What is Market Potential and How to Calculate It

Last update on April 14, 2016.

Calculating market potentialSo you just started a business, own a small business or are launching a new product, why bother estimating market potential? This is a very important step when running a business. First, it will show whether you have a big enough market for your product or service, and second, it will open your eyes to possible new opportunities and actions you may take to help with success. Market potential is all of the possible people that would purchase your product or service, multiplied by an average selling price and by an estimate of how many products those people would purchase or how many times they would use your service. Market potential is NOT all of the people in the entire world; they must be people in your target market with the ability to purchase. For example, a 2-year-old girl in China will not come to your hair salon in Manhattan. She should not be in your market potential estimation.

In order to calculate market potential, you need to estimate many of the variables. It is impossible to calculate market potential 100% accurately. As long as you carry the estimations along throughout the entire calculation and state them, it is as accurate as it can get. Here are a few easy steps on how to calculate market potential:

To make this easier, we will use the example of the hair salon in Manhattan.

Define your target market Women ages 25 to 40 who live or work within a five mile radius of the salon, have a household income of $80k+, and want a full service salon that provides hair and nail services.

Research to find out how many people are in your target market (what your market size is) There are 1.6 million people living in Manhattan. The city of Manhattan is 2.3 miles wide and 13.4 miles long, meaning that a little less than half of Manhattan is within our geographic market (800,000). Taking into account that there are men in this number and also females of other ages, lets estimate that one-fourth of the geographic market is women of our age group (200,000). The median household income in Manhattan is $70k. Estimating that half of these women earn this household income, that leaves us with a market size of 100,000.

Estimate how many times your product or service would be purchased or used These women will most likely come to the salon at least once per month for a hair service and a nail service.

Estimate how much the potential customer will spend These women will spend an average of $200 a month on these services, this is Manhattan after all!

Combine all the numbers for the market potential (Market size multiplied by number of times the service is used multiplied by the amount spent each time) 100,000 women x 12 times per year x $200 per visit = $240,000,000

Now $240 million is a very attractive market. This is the market potential of the salon in Manhattan, but remember that it does not mean that the salon will ever reach $240 million in revenue. This is what all of the salons going after the same target market in Manhattan should earn combined. The most important actions to take while calculating market potential are to do your research and to carry the estimations throughout the entire calculation. The example above shows the estimations of the number of women in the market carried through all the steps and it clearly shows how that number came about.


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