Based on market size and the assessment of market growth, you need to calculate market potential: How big can the market become? When is the market completely saturated?
Determining market potential is an important part of the market analysis in your business plan. Trends and product life cycles are important factors for market potential. The effective market potential has impact on the sales potential of your business idea.
An important part of the market analysis: the market potential
After you have the current market size (including market volume), market dynamics as well as the market growth in your business plan, there is still no information on the theoretically possible market size: you must calculate market potential. With the market potential, you complete the area of market analysis in your business plan.
The market potential shows when a complete market saturation can be talked about. Statements on the market potential can provide information on whether the market is likely to grow in the future (significant market potential exists) or remain stable (market potential has been exhausted).
Your assessment of market development has an impact on the chances of success of your start-up: because it tends to be easier to succeed in a market that has further market potential and is growing accordingly than in a market that is stagnating. and whose market potential is low.
3 Steps: How to calculate market potential
In order to provide a sound estimate of the market potential, we recommend that you integrate the following three points into your business plan:
- Trends in and around your target market
Existing or new trends can have a major impact on market potential. It is important to identify them at an early stage.
- Don’t forget the product life cycle
The market potential in the growth phase differs significantly from the market potential in the maturity phase. What is your offer at what stage of the product life cycle?
- Market potential: A simple calculation
After you have identified market size, determined market growth, analyzed trends, and determined the product lifecycle, you can make an initial estimate of market potential. You can also easily calculate the market potential…
1. Trends influence market potential
Describe in your business plan whether you are following a new trend with your company or whether you are entering an already established market. Mention the trends of the respective industry and explain in your business plan how these trends have on the market potential. A trend may also have a negative impact on your market potential – this is also part of the business plan!
Information on trends can be found either at Associations, Industries/Market Studies or trade journals.
2. Dependence on product life cycle and market potential
When a new product comes onto the market, only small quantities are usually sold in the initial phase, but the market potential is also high. As popularity increases, so does demand and thus profit – as long as competitors recognize the interesting segment and offer competing products – the market potential becomes smaller.
First of all, there is great market potential in the introductory phase. Following phase 1, the market is characterised by high market growth (growth phase), in which the market potential is increasingly exploited. During the ripening phase, there is less and less additional market potential and, accordingly, competition is increasing. The saturation phase is characterized by very low market potential, which usually decreases continuously. During the degeneration phase, the product is then replaced by a new product, a new trend, as there is no longer any market potential.
In your business plan, you should show the phase of the product lifecycle that you are in with your offering. This allows you to better estimate the market potential and is already prepared for the next phase. The product life cycle is also important for future investors, who tend to invest more in a growth market with high market potential.
3. Theoretically possible market size: the market potential
After you have analyzed the trends and defined the product lifecycle, you can already make an initial estimate of the market potential. Nevertheless, it is helpful to quantify the market potential, as this is an important part of your market analysis. The theoretical market potential can be determined relatively easily using the following formula:
The goal is …
… that your business plan quantifies the market potential and you mention the most important trends that can have a significant impact on the potential. Determine the product lifecycle and try to use graphics in this chapter that quickly and easily show the business plan reader how big your market potential is.