Market potential is the maximum possible size of a market, that is to say, the revenues in the situation when 100% of customers demand a product or service. In other words, it is the maximum size of a given market.
What for do we have to know the market potential?
Market potential represents the maximum theoretically achievable revenues if one organization dominates the entire market, which is unrealistic under normal market conditions. When reaching market potential, revenues will not increase even with increased marketing spending and business effort. It is the ceiling of the product market.
It is important to estimate the market potential when compiling a business plan - it is important for us to know “how much money is being spent in that market”. The company can then assess its chances - how much of a market share can be achieved and what could be the estimated future earnings.
Knowing the size of the overall market potential is one of the basic things that a company or a startup should know before presenting their business plan to investors. Together with information on an estimated market share, it is one of the key indicators for investor decision-making in terms of “how much money is hidden in there”.
How do you measure market potential?
Market potential will never be an exact number. It’s always an estimate, even if it’s done by a professional company. So you can either build upon data from analytical companies that estimate the size and trends in ordinary markets (whether it is growing and how quickly) or, if such information is not available, you can make the estimate yourself or hire a specialist who performs a qualified analysis and estimates (or measures by some other means) its maximum size and overall potential.