Market potential, quite simply, is the total demand for a product in a given business environment. 5 elements to determine market potential are-
A) 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. 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.
B) Market growth rate: The ongoing trend in the industry is important as it can forecast 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 Initially, books were all the rage, but now they have been replaced by eBooks and there is hardly any need for the physical books (though people still love to read them).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. 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.
C) 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 multinational 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. 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.
D) Profitability: 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 (e.g. FMCG products) or if the business is going to give low volumes, then the profit needs to be higher (e.g. industrial goods).