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Market Potential of a Product: Definition & Analysis Example

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  • 0:04 Definition of Market Potential
  • 0:49 Analysis of Market Potential
  • 4:45 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
An important step before moving forward with a product is determining its market potential. In this lesson, you'll learn about market potential, examine a method to analyze it and read through some examples. A short quiz follows.

Definition of Market Potential

Market potential is the entire size of the market for a product at a specific time. It represents the upper limits of the market for a product. Market potential is usually measured either by sales value or sales volume. For example, the market potential for ten speed bicycles may be worth $5,000,000 in sales each year. On the other hand, the market potential for motorcycles may be 500,000 units each year, which is a measure of sales volume rather than sales value. Keep in mind that market potential is just a snapshot in time. It's a fluid number that changes with the economic environment. For example, rising and falling interest rates will affect the demand for products that are typically financed, like cars and houses.

Analysis of Market Potential

Determining the market potential of a product is part of a successful marketing process and requires marketing research. You'll need to examine at least three factors that will determine whether the market potential of your product is worth the investment. You need to analyze your potential customer base, analyze your competition and analyze the current environmental conditions that may affect market potential.

Analyzing Potential Customer Base

You need to determine the size and demographic characteristics of your potential consumers. Important information to obtain includes the population size of your target market, their product preferences and their median annual household income. This will tell you the number of potential customers and whether they can actually afford the product.

You can assess your product's potential customer base by analyzing secondary data, or data that already exists, such as demographic data collected by the United States Census Bureau on household demographics in each state. You may also decide to collect primary data, which is data you collect specifically to analyze the market potential of a product. Typical means of collecting primary data include telephone surveys using a random sample of households drawn that you believe match your target market.

Analyzing Competition

Unless you are very fortunate and are bringing an entirely new type of product to the market, like the first iPod, you'll almost certainly have competition. It is important to assess the number of your competitors, their respective share of the current market and how your product can be differentiated from theirs. This research can be undertaken using both primary and secondary research. Secondary data sources may include industry surveys, membership directories of industry organizations, data collected by local chambers of commerce and data collected by state agencies. Primary data can be collected by simply shopping around and examining your competition from the perspective of not only a competitor but as a consumer.

Analyzing the Current Environment

Remember that market potential is not a static concept - it changes with the general economic and political environment. For example, if interest rates go up, people may not be willing to use credit to purchase big-ticket items, like cars and boats. This will lower the demand for those products and decrease the product's overall market potential. A change in tax rates may also suppress spending as less money is available on discretionary purchases, thereby reducing a product's overall market potential. Of course, market potential can increase if wages increase, taxes are lowered or interest rates decline because product demand may increase.

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