Market potential is a hot topic in the sales analysis game right now. With some industries booming and some overly saturated, sales leaders need to know where their businesses stands. Is your business growing at 10% year-over-year or are you losing customers left and right? Either way, calculating market potential is a key ingredient to hitting your sales quota.
Now you're asking yourself "What is My Market Potential?"
The first step is analyzing your existing customer spend. Have you read our last sales analysis post on firmographics? If not, you should know that identifying where your business has the highest propensity to sell its services or products is essential to calculating market potential.
For example, if a large percentage of your existing customers fall in the Financial Services industry and are companies with >250 employees, begin your analysis here.
Isolate this firmographic and conduct a frontier potential analysis.
What is frontier potential?
Frontier potential is defined as the ideal customer spend within your chosen firmographic boundaries. Typically our sales consulting firm uses the 80th percentile spend. This represents what you aspire all your customers to spend and is the basis of calculating market potential.
If you have 5 companies within your 250+ employee Financial Services sector spending the following amounts: $10K, $20K, $50K, $75K and $90K, then the frontier potential analysis would say that $75K is the ideal customer spend.
Now that we have frontier potential we can begin to extract the target market prospect universe.
How do I pull prospect universe information?
The most important piece of market potential is knowing how many companies existing within your firmographic variables. This is where having a third party proprietary database is helpful. Our firm uses Hoovers, but some others include Dow Jones Companies & Executives or InsideView**. When you are at this point, you want to do an isolated search on the firmographic variables.
Industry: Financial Services
Employee Size: 250+
Region: North America
Result: 500 records
The last thing to do before calculating market potential is identifying current market penetration.
What is my market penetration?
Market penetration is representated by the proportion of your current customers to amount of companies within the target market.
In our example, the market penetration would be 1% (5 current customers/500 potential customers= 1% market penetration).
Penetration rates are great for comparing your business against your competitors.
With the ideal customer spend, the prospect universe and your business' market penetration rate, you are now ready to calculate market potential.
How do I calculate the total market?
Click here to download the "What is My Market Potential" tool.
What do I do with my market potential figure?
Now you are ready to conduct the same type of market analyses across a wide range of firmographic variables. Doing so will help you prioritize market segments, resources and spend time more efficiently.
Have a different way of calculating market potential? Want to build upon any steps listed above? Leave a comment and let’s compare methodologies.
**Note: If you do not know how many firms are in the market but you know your market penetration is 1%, work backwards in your calculations to determine an approximate amount of customers (5*1%=500)