Estimating Market Potential

8/4/2019 Estimating Market Potential

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Estimating Market Potential:Is There a Market?

Estimating Market Potential:

Is There a Market?Karen Mundy, Department of Agricultural and Applied Economics, Virginia Tech

S. Gary Bullen, Department of Agricultural and Resource Economics, N.C. State University

Adapted from material by Kent Wolfe, Department of Agricultural and Applied Economics,

University of Georgia

The Business Development Files

Part 1. What the Agent Needs to Know

Your clients have decided the price they want, thegeographic location o the market, their possiblecustomers, and who and where the competition is. Next,they must calculate the portion o the market they canreasonably expect to capture. Market potential is anestimate o the amount o money your clients can expectto make rom the product or service they plan to market.Teir estimate will only be as good as the inormationthey use and the assumptions they make. Tere are sevensteps to estimating market potential (they have already completed the rst our steps).

1. Dene the market segment (target market).2. Dene the geographic boundaries o the market.3. Dene the competition.

4. Dene the market size.5. Estimate market share.6. Determine the average annual consumption.7. Estimate an average selling price.

Step 5, estimating the market share or potential, will allowyour clients to determine i their markets will support theirbusinesses by covering their costs and paying them a salary.Generally, the market potential is the highest estimated netrevenue that they will realize rom their enterprise. In thesecond meeting, you covered estimating a price. When they estimate market potential and use the price they calculated,they will see i they have covered their costs. One way oryour clients to use their market potential analysis is tochange their assumptions and see i they can still covertheir costs. Tey can either lower their expectations o thenumber o people who will buy rom them, or they canraise their prices. Writing down the assumptions they useto estimate their market potential and the changes they make to those assumptions is essential.

Te market potential is the number o potential buyers, anaverage selling price and an estimate o usage or a specicperiod o time. Te general ormula or this estimation issimple:

Estimating Market PotentialMP = N × MS × P × QWhere:MP = market potential

N = total number o potential consumersMS = market share—percent o consumers

buying rom youP = average selling priceQ = average annual consumption

o illustrate the concepts discussed, we use the agritourismexample o a armer wanting to add a corn maze andeducational tour.

Defne the market segment

Your clients have identied the target market o thecustomers who are most likely to buy rom them. Tetarget market was generally described using demographic variables: gender, age, education and income. Te marketis also described using psychographic variables: liestyle,interests and belie system variables. A client might havemore than one target market. Te most important pieceo inormation rom identiying the market is how many potential customers t the target market description basedon the variables a client chooses:



Estimating Market Potential: Is There a Market?The Business Development Files

■ age■ marital status■ household income■ gender■

race/ethnicity ■ education

Because not everyone in the dened market area will be acustomer, each client needs to compare the target marketprole to the population in the market area (see Bullen,2006). Market areas are dened in several ways. Somemethods require easy-to-collect data, whereas othersrequire more complex data and the services o a marketingproessional.

Defne the geographic boundaries o their market Your clients have dened their market areas by geography,ring analysis or radius, trade area or drive-time. Mostlikely, they used geography, the simplest orm o dening amarket area. It denes the market area by using landmarksor some jurisdictional boundary, such as

■ neighborhoods (based on U.S. Census block data)■ zip codes■ city or county boundaries■ Metropolitan Statistical Areas (MSA) state

(multi-state) borders

Defne their competition

Te next piece a client needs is inormation about thecompetition. Continuing the agritourism example, yourclient nds out who the competitors are in the market andwhat they are ofering.

Example—AgritourismAssume your client nds three other arms with cornmazes. One has a petting zoo and pumpkin cannonincluded in the admission price. Te other two arms

ofer the corn maze as one o several activities, includingpick-your-own pumpkins and apples, hay rides anda haunted house—each priced separately. Your clientdecides to ofer the corn maze and an educational touro the arm. Each participant will get a small bag o apples at the end o the tour. Te tour includes a hay-ride around the arm with stops at various picturesigns that point out production practices used andcrops grown.

Defne the market size Once a client has dened the market area, target marketand total number o people in that market, he calculatesthe number o potential customers or the business.

Te total market will typically be adjusted downward toconsider those who will not buy rom your client. From thetotal people in the target market, the client estimates thepercentage o consumers who would use the products orservices.

Example—AgritourismAssume the arm is already an agritourism operation.Your client wants to ofer a corn maze as well assomething educational. Te client decides to targetchildren in kindergarten through third grade. Te targetmarket area is Wake County, which has 45,700 childrenbetween 5 and 9 years o age. Tereore, N (number o potential customers) = 45,700. Tey ound this numberin the 2000 U.S. Census.

However, not all children under 9 will visit any agricultural acility. Te client’s next step is to adjustthe 45,700 to get a more accurate estimate o theactual market potential. A survey o elementary schoolteachers showed that 60 percent o kindergarten throughthird-grade teachers are willing and able to take an

agriculturally related eld trip.

As a result, the 45,700 kindergarten through thirdgraders needs to be multipled by 60 percent. Tiscalculation results in an adjusted market potential o 27,420 potential students.

Number o Potential Consumers = 45,700 × 0.60 =27,420

Determine the average annual consumption.

Next, your clients determine how oen their targetmarket segment would use their product or service. Tisgure will have a signicant impact on the estimatedmarket potential. For instance, is a product purchasedrequently, occasionally or inrequently? Obviously, themore requently the product is purchased, the larger themarket potential. An abundant amount o consumptioninormation is available rom the government as wellas industry trade associations. For example, the USDA




collects volumes o disappearance (consumption) data ormany commodities and converts it into per-capita annualusage (consumption) estimates.

Te quantity o product your clients are selling would vary based on the product being sold. For example, i aclient sells honey, the same customer may buy it ve timesin a season. I, however, a client is selling hayrides, mostcustomers will buy only one in a season.

Example—AgritourismTe client ofers educational hay rides and a corn mazeand assumes that students would come only once withtheir classes. I the client ofers the same package onweekends or or special events like birthday parties,

some students might come two or three times.

Usage would be how oen these school groups will takean agriculturally based eld trip within a school year.Te survey o elementary school teachers indicated thateach teacher plans to take only one agriculturally basedeld trip this year. Tereore, use “1” as the estimateo use:

Q (quantity used) = 1

Calculations or Estimating Market ShareMarket share is the percentage o a market (either innumber o units sold or revenue) accounted or by eachbusiness. It provides important insight into how much o the total potential market a client might capture. I themarket share is not large enough to support the business,the client has a problem. Also, i the number o unitsneeded or the business to break even nancially is known,the client can determine what share o the market mustbe captured to achieve this break-even point. Your clientsneed to be careul not to estimate an unrealistic market

share. Te result could spell nancial problems.

Estimating market share is dicult because o the lack o inormation. Some trade associations or marketresearch publications and stories will supply some basicmarket share inormation, but nding directly applicableinormation or each client’s business may be impossible.Your clients should estimate various scenarios based onwhat inormation they have. Remind your clients to writedown the assumptions they use so that they can go back later and revise based on new inormation.

Example—AgritourismAssume three existing agritourism operations are in aclient’s market area. What percent o the total market

might your client be able to acquire? Because data onagritourism in the area are not collected, your clientwon’t be able to come up with an accurate number.However, or planning purposes, you can “guesstimate”a market share. In this example, it is the number o unitssold—the number o students going on the arm tour—that is being calculated.

First, your client assumes that each o the competingarms in the market area has an equal share o thepotential market, or 33.3 percent o the 45,700 childrenbetween ages 5 and 9. Next, the client assumes that i

he enters this market, he will take an equal part o eachexisting operation’s business. Te goal is to capture25 percent o the total potential market. o calculatethe market share or each o the competitors, use thisormula:

Market share = 100% ÷ number o competing businessesMarket share = 100 ÷ 3Market share = 33.3% or each o the existingagritourism businesses

o assume your client will get 25.0 percent o the

market (assuming they divide the existing marketevenly our ways) is probably unrealistic since thebusiness is new, and the competitors have existingcustomer bases. Your client can easily change theassumptions. For example, he assumes that he cancapture 3.3 percent rom each o the three existingoperations. Te client would then have10 percent o the total potential market.

Using the total population o 45,700, your clientestimates that only 60% o those children wouldprobably be able to go on a eld trip. When completing

the calculation, the client nds only about 27,420(45,700 × 0.60 = 27,420) would actually go on anagricultural eld trip. Your client decides to use thislower number (27,420) and 10 percent or the marketshare or the rst year. Your client nds he will haveabout 2,742 (27,420 × 0.10 = 2,742) children. Tismarket potential number potential will help yourclient determine i the plan is easible.




Your client has the ollowing inormation to use incalculating the market potential or an agritourismoperation:

N otal number o consumers(based on Wake County census): 45,700

MS Market share (based on teacher survey resultstimes the client’s estimate o how much o themarket can be captured rom the competition):0.06*

P Average selling price (based on cost o production):$8.00

Q Average annual consumption (number o visits

per student based on teachers’ survey): 1

MP = N × MS × P × QMP = 45,700 × 0.06 × $8.00 × 1MP = $21,963

*o calculate the percent o consumers buying rom aclient, multiply the percentage o consumers who arepotential customers by the percentage o the market theclient expects to capture rom competitors. In the example,

this calculation would be 0.6 × 0.1 = 0.06

Any market potential estimate is only as good as theassumptions a client makes and the data used. Yourclients are better of estimating on the low side and settingtheir prices to cover their costs. I an estimate o marketpotential is low, the client will show a prot above his orher costs. I, however, the estimate is too high, your clientmay nd it dicult to pay the bills at the end o the season.






What percent o total potential customers go to the competition?

CompetitorNumber o

customers

Percentage

o market

Market share

(customers × percentage)

Competitor 1

Competitor 2

Total all competitors

7. otal the inormation:

Numbers you need to estimate your market potential:

Total number o potential customers (N)

Total consumption (Q)

Total market share (MS)

Your price per customer (P)

Estimating Market Potential: MP = N × MS × P × QWhere:MP = market potentialN = total number customers

MS = market shareP = average selling priceQ = average annual consumption (usage, number o times individual would attend)

Your numbersMP = N × MS ×P × Q

N = ______

MS = ______

P = ______

Q = ______MP =




Reerences

Bullen, Gary. 2006. Direct Answers for Direct Marketers.Marketing Resource CD developed as part o Southern Region Sustainable Agriculture Research

and Education (SARE) grant. Raleigh: N.C. StateUniversity, Department o Agricultural and ResourceEconomics. Contact [email protected].

McConnon, J. 1996. Estimating Retail Market Potential.Bulletin #3012. Home-Based Business Fact Sheet series.Orono: University o Maine Cooperative Extension.Online: http://www.umext.maine.edu/onlinepubs/ htmpubs/3012.htm

Wole, K. 2006. September. Estimating Market PotentialCheck-List. Center Report 06-08. Athens, Ga.: Center

or Agribusiness and Economic Development, TeUniversity o Georgia. Online: http://www.caed.uga.edu/publications/2006/pdf/CR-06-08.pdf

Estimating Market Potential

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