Market potential

Market potential estimation method

Based on consumption norms

MPt = TP × SC × CNt × AC × AP

TP — Total population of the targeted area

SC — Share of population, who have a need for the product
CNt — Average # of times 1 person consumes a product in time t
AC — Average # of products consumed per 1 person at once
AP— Average price of a single product

To measure the market potential a method based on consumption norms is usually used. It is
calculated as the total population of the targeted area multiplied by the share of population, who
have the need in the product, the average number of times 1 person consumes a product at a
particular period, the average number of products consumed per 1 person at a time and the average
price of a single product.

For the earlier defined electric toothbrushes market the total population is estimated as total
population of US, which is 327 M. The population share which has the need in the product
according to the defined market scope will be comprised from several multipliers: the share of
people older than 6, which is around 92%, and the percentage of people living in households with
average income or higher, which is 45%.

If a typical electric brush lasts 3 years, the average # of times a person would buy a toothbrush per
year is 0.3. As people don’t use more than one toothbrush at the same time, the average number
of product consumed is 1. The average price of the product is calculated by taking a mean value
from the prices of competitors, and is 50$.

MP (toothbrushes)= 327*0,92*0,45*0,3*50= $2, 030 B

A replaceable toothbrush head costs in average 10$ and should be replaced every 3 months.

MP (toothbrushes)= 327*0,92*0,45*4*10= $5, 415 B

In total the market potential would be: $7,445 B, where about 62% of the market is comprised
from sales of replaceable heads.
 Available market

Available market

Based on adduction coefficients

AMt = MPt * CP * K1 * K2 * K... * Kn
AMt — Available market at period t
MPt — Market potential at period t
CP — Product category penetration
Kn— Available coverage: distribution, communication

To account for the available market, the potential market must be deducted of every consumer
group, which is currently unreachable and are not likely to become reachable in a short notice. We
take into account that the product penetration for the product is currently 60%, as about 40% of
people living in the US give preference to manual toothbrushes. The Amish and the community of
environmental activists in the US, who would never use such a product, together comprise about
2% of the population.

AM= 7,445*0,6*0,98= $5,419 B

In total the available market would be: $5,419 B

Market volume

Market volume measures

There are 7 ways in which you can calculate the market volume. If you are able to get hold of
information about the previous period market volume, and the average growth rate for the market,
you can get the approximate number for market volume in the current year.
Based on growth rate
MVt = MVt-n * (1+GR)
MVt-n — Market volume of earlier sold product
GR — Market growth rate
For example, we’ve found that in 2014 the sales value was $354 M. During 2015 to 2017, the
growth rate for the market was about 1,5% per year for the US.

MV2015= 324*(1+0,015)=328,86
MV2016= 328,86*(1+0,015)=333,79
MV2017= 333,79*(1+0,015)=338,79

So the market volume for 2017 can be estimated to be around $338,79 M.

 Based on exploitation expiration
MVt = MVt-n * n *(1/ Tex )
MVt-n — Market volume of earlier sold product
Tex — Exploitation period; 1/Tex — Expiration of exploitation pace
The next method is based on calculating the expiration of an already bought product.
So, if divide the $354M (the 2014 market volume) 62% and 38% (ratio of sold heads VS sold
brushes) based on our market potential estimations we have $219,48 for brush heads and
$134,52M for brushes. Then, if we divide the sales value by the average price of each product we
can get the quantity sold that year.

Sold quantity of brushes in 2014 = $134,52M/$50= 2,7M

Sold quantity of brush heads in 2014 = $219,48M/$50= 22M

Knowing that this type of product useful exploitation period is, for example, 4 years (although the
typical warranty lasts 3 years), we calculate the predicted expiration of exploitation pace as 1/4,
reflecting that every year 25% of electric toothbrushes bought in 2014 would be replaced.

MVb=2,7M*3*(1/4)=2,025M

Hence, by 2017 it is possible to expect that 75% (=3*(1/4)) of the toothbrushes bought in 2014
will have to be replaced. If we multiply it back by its price, we get 2,025M*$50=$101, 25M

By 2017 the earlier bought heads would be long expired, so we can expect the consumers will
again spend more or less the same amount of this type of purchase assuming that the price for
replaceable heads stayed the same.

Hence the market volume would comprise $101, 25M +$219,48M= $320M, assuming that the
prices are the same and that the market is not growing, or declining.
Measure based on market shares
MVt = ((SVA+ SVB + SVn) /(MSA + MSB + MSn))*100
SVn — Sales volume of company N at period t
MSn — Market share of company N at period t

Without an available estimation of market value from previous years, it is possible to look at the
sales value of main competitors. We’ve found out that Crest, Oral-B, Fixodent, Scope and Zooth
brands command a 33% value share. These are all brands owned by P&G. By looking at annual
reports we find that the Company had net sales in the U.S. of $27.3 B, and oral care comprises 8%
of this number. By analyzing the assortment of oral care products offered by the company we
assume that the share of electric toothbrushes is about 10% of total sales.
We multiply these coefficients to get the total sales value of P&G products and divide it by its
share of the total market, which is 33%.
MV=($27,3*0,08*0,1/33)*100=$661M
The result is $661M
 Based on trade panels
MVt = SA * NA + SB * NB + ... + Sn * Nn
Sn — Sales of an average “type n” company at period t
Nn— Number of “type n” companies n the market at period t
If you have access to a trade panel – a data base of companies from a particular industry – and you
also know the total number of companies in the market, you can gather the information on sales
volume from the available companies and then multiply the estimate by the number of companies
in the market. If the companies in the market vary by type (e.g., size, production capabilities, range
of products produced), it would be wise to calculate the sales value for every type of company
separately first, and then combine the results.

Based on total people employed

MVt = (SA /SizeA) * Sizei
SА — Sales of an average company A at period t
SizeA — # of employees working for company A at period t
Sizei — # of employees working in the industry at period t
If you only possess the information about how many workers there are in your industry, by
dividing the sales of one typical company on its size (number of employees), you can understand
the sales per employee ratio, and then extrapolate further.
Based on production estimates
MVt = PRt + Vit – Vet +Vst
PRt— Products produced in the country at period t
Vit — Volume of imported goods; Ve – exported goods at period t
Vst — Stored reserves, including governmental reserves at period t

Based on adduction coefficients

MV = MVR * K1 * K2 * ... * Kn
MVR— Market volume for relatively similar regional market
K1 — Adduction coefficient (meaningful for purchase habits
differences in income, education, population, etc.)
If you have the data on market volume from another region (another city or country), you can try
to use this information to get the market size of the area in interest by using adduction coefficients,
which reflect your estimation of the major differences between the regions (e.g., if the population
is twice as small, you multiply by 0.5).
 Target market

Target market

TMt= MVt * PPt+1

MVt — Market value
PPt+1— Expected product penetration
(Sales channels you intend to use (retail, online, wholesale, etc)
Number of locations you will sell from (number of retail stores,channels, etc)
Revenue and growth stats from competitors)

You get the target market by multiplying market volume on expected penetration – your subjective
estimation of how successful you are going to be in the next period. These calculations often
depend upon the product penetration established in the last periods and on known planned actions
of main competitors.