From potential demand to market penetration: what you need to know about your business
Even if you believe you have a definitely winning business idea and a viable business model, before you make your entry into a market it is good that you take the time to perform a fundamental task: you need to calculate market potential. But what does that mean? In a nutshell, you need to estimate the potential demand related to the product or service you intend to offer your customers.
Don’t get carried away by enthusiasm: it is all right to place high ambitions in your project, but remember well that in order for you to succeed in selling your product or service, there must be someone willing to buy it at a price that guarantees you an adequate profit margin.
To evaluate this, it is important that you maintain proper objectivity and ask yourself a number of very specific questions. Let’s start with the first.
What is market potential
The first step, as it always should be, is to make sure you are clear about the terms used. We have talked about “market potential“: this concept can be defined as the limit toward which market demand tends as marketing investment in that area, in a given environment, grows indefinitely.
To fully understand the above definition, other concepts should be introduced. The term “market” refers to the set of actual and potential buyers of a product or service. The “potential market“, on the other hand, is the set of consumers who show interest in the market supply. Different is the “available market“, which is all consumers who have interest in the market supply, but also income and the ability to access it. Within the latter category of consumers, it is also possible to identify the subcategory “qualified available market“, that is, the set of consumers who have interest, income, access and requirements for a given market offer. It is also useful to distinguish between the “served market” (the part of the qualified available market that the company decides to target) and the “penetrated market” (the set of consumers who, in fact, purchase the product or service).
It may help to imagine the concepts just defined as a series of sets, from the largest (“potential market”) to the smallest and most specific (“penetrated market”).
Let us define, now, the concept of “market demand“: it means the total volume of a product or service that would be purchased by a specific group of buyers, in a specific geographic area and in a defined period of time, in a specific marketing environment and within a specific marketing program.
Finally, let us introduce another concept that is useful to our analysis, namely that of “market forecasting“: it is market demand that corresponds to the expected marketing effort.
The basic questions for making a faithful estimate
To make a faithful estimation of the demand for the product or service you intend to propose, as mentioned, you need to ask yourself a number of questions. First, who are the customers? Are they local, national or global? Are they a sufficient number? Are they reachable? Another key question: what are these customers looking for? Are you able to offer them a viable alternative to what is already on the market?
By staying on your target audience, you can investigate many other aspects, such as buying habits. Don’t focus, however, only on customers. Think: Who are the competitors? What do they offer and at what price? Do they pose a threat to your business? And again: what trends do competitors show? Are they growing, stalling, or declining?
How to estimate potential demand and make forecasts
To estimate potential demand, therefore, it is necessary to focus on customers as well as competing companies. Formulating the right questions, however, is not enough: to find the right answers, you need to conduct thorough research. There are many tools at your disposal: the consumer reviews you find online are very useful for those who want to analyze competitors and understand consumer preferences. Likewise, you can also consult specialized magazines and blogs to study trends and catch new market trends. Social media provides you with a lot of different data about consumers. Then remember that you can find out more information through online questionnaires and surveys, but also by attending industry trade shows and talking to experts in your field.
It is very important to refine the idea in light of the new insights provided by your stakeholders and then, if that is possible, test the product or service on potential customers (perhaps by providing a free trial session). This practical step will make it even clearer to you whether your idea works, is improvable, or should be shelved.
Having reached this point, an additional round of basic questions will be needed: is the customer base large enough? How much are customers willing to pay for your product or service? How many competitors are there? What impact can they have on your business?
In order to estimate potential demand in the right way and make forecasts that turn out to be correct, you have to analyze the situation from several angles. There are, in fact, several estimates of demand.
Evaluation of the demand for the product
The first criterion by which demand assessment can be made concerns the product itself. Specifically, a single product or a particular line, company sales, and industry sales can be considered.
Evaluation of demand in spatial terms (geographic and demographic)
Another criterion for evaluating demand concerns space: in this regard, it is possible to reason in purely geographical terms, taking into consideration a province, a region, a nation or the whole world, but also in terms of demographics.
Evaluation of demand in terms of time (forecasts on future demand)
Last but not least is the criterion of time: the evaluation of the application can concern the short term, but also a longer time frame (medium or long term).
Potential Market Assessment Frequently Asked Questions
One of the most frequently asked questions regarding the evaluation of the potential market is: but can the market demand, therefore, be identified with a fixed number? The answer to this question is “no”. Market demand, in fact, is a function that is able to illustrate the different alternatives of the current market demand forecasts associated with the possible alternatives regarding marketing efforts.
We have introduced several concepts that are perhaps new to you and tackled complex issues. The question may arise spontaneously: what is all this for? To understand it, just go back to the beginning of our reflection: you cannot sell a product or service if there is no one willing to buy it at the price that is convenient for you and finding out when the product or service is on the market would be really too late and would quickly and painfully decree your failure.
Estée Lauder, founder of Estee Lauder Cosmetics, once said:
“I have never dreamed of success. I worked to get it ”.
Now you too know how you have to work to achieve the much desired success.