The key role of market potential

Why is it so important to determine the market potential?

Determining market potential is the basic prerequisite for strategic product decisions. Companies that do not understand their market potential run the risk of utilising resources inefficiently and overlooking opportunities. Knowing the market potential makes it possible to make targeted investments in promising areas and strengthen competitiveness.

Why is determining market potential often a challenge for product managers?

In most cases, product managers are not handed market potential figures on a platter. Determining them is often associated with hurdles and challenges that people shy away from. The effort involved in determining market potential is then not recognised as an investment in long-term success.

As a product manager, you are the architect of the future for your company. By dealing with the topic of market potential, you lay a solid foundation for strategic decisions. By realising that uninformed decisions can lead to long-term disadvantages, you are actively contributing to the success of your company.

Yes, calculating market potential can be exhausting and time-consuming. But if you want to be successful with your products, the only way is to rise to the challenge. Let’s face it: It’s your job!

The good news is that there are many ways to reliably identify market potential. This work often resembles a jigsaw puzzle and detective work. Gathering information and developing a comprehensive picture of the market is exactly what you need to deliver as a product manager. Product managers need to develop the ability to recognise and communicate the benefits of identifying market potential. The long-term positive impact on business success is often not immediately obvious and it is the product manager’s responsibility to communicate this to the decision making bodies.

How exactly does the market potential calculation work?

The basis – common understanding of market key figures

Before you can start determining the market potential, it is essential to lay the foundations. The first priority here is to define relevant key market figures. Product managers should familiarise themselves with key figures such as market volume, market growth, market share and customer demand. This knowledge forms the foundation for a precise analysis and makes it possible to understand the market in all its complexity.

In addition, it is crucial to create a common understanding within the company of what exactly ‘potential’ means and in what context it is viewed. Potential can have various dimensions, be it the sales potential of a product, the sales potential in a certain market segment or the growth potential in new geographical regions. A standardised understanding within the company ensures that all departments work towards the same goal and view the determination of market potential as a company-wide task.

Establishing this common understanding requires a structured exchange between different departments, particularly between product management, sales, marketing and finance. Collaboration across departmental boundaries not only promotes clarity, but also a comprehensive view of market potential. In this way, identifying market potential becomes a collective endeavour that sets the entire company on a successful course.

Calculation model as a core instrument

The creation of a systematic calculation model becomes the task of the product manager. This model becomes an instrument that forms the basis for well-founded product decisions and sets the direction for the company’s success. The first step is to develop a logic for calculating how to reach a certain market potential. Once the logic is in place, the puzzle work begins. It is normal that you will not be able to completely fill the calculation model right from the start. As a rule, you will compile the data gradually from various sources. So don’t be frustrated if you’re just starting out and have little hard data to work with: It’s not a bug – it’s a feature. You will slowly work your way up and get a more complete picture over time. The good news is that you can systematically establish solid working hypotheses and then readjust them again and again. In the end, you will be richly rewarded for this work: you will become a product market expert.

Methods for determining market potential

Determining market potential requires not only a solid understanding of market conditions, but also the use of suitable methods to obtain precise and meaningful information. In the following section, we will look at various methods that will help you to systematically analyse market potential and make well-founded decisions for the success of your company.

Top-down approach: The overall market potential is estimated and derived on the basis of general and superordinate market data. This method is particularly useful when detailed information is difficult to access.

Bottom-up approach: In contrast to the top-down approach, the bottom-up approach starts with specific data and aggregates it to determine the overall potential. This is particularly effective when detailed knowledge of specific segments is available.

Competitor analysis: If you add up the product sales of all competitors and your own in a defined market in a defined time period, you obtain the actual market size. Competitors’ product sales can be determined from publications or annual reports, for example. In some industries, there are also sales reports from associations that show the overall market size. If your own sales organisation has a good overview of the market, it is relatively easy to extrapolate the overall market size using systematic win/loss deal reporting in CRM. The latter works particularly well in the capital goods sector.

Analogy method: Using the principle ‘Customers who bought this also bought that’, you can try to deduce the potential of your own product from other products. This is because it may be easier to determine the size of the other products.

Market studies: If available for your products, market studies are a convenient source of market data. However, the acquisition of such studies often involves an investment or even has to be commissioned in the first place. The quality of market studies can also vary greatly.

Purchasing market studies: What to look out for?

Caution is advised when purchasing market studies. Here are some important considerations:

Market definition: Check exactly which markets and segments are being analysed in the study. A clear market definition is crucial to ensure the relevance of the study to your organisation and that you are clear on the scope of the market potential data.

Scope of the study: You need to understand exactly which aspects of the market are being analysed in the study. This will help determine whether the information is sufficient for your specific needs. If you have already established your own calculation model, this task will be very easy for you.

Methodology: Pay attention to the methodological approach and data collection of the study. Which sources were used? How exactly was the data collected? Transparent and valid methods strengthen the credibility of the results.

Timeliness: Markets change quickly. Make sure that the information in the study is up-to-date so that you can make well-founded decisions.

Test the quality: Ask the provider of a completed market study to show you extracts from it that you can assess well yourself, e.g. the data that the provider has collected on your company and your products.

Overall, determining market potential is a critical phase in any business. Through thorough analysis and the right choice of methods and studies, companies can make better-informed decisions and strengthen their position in the market.

The effort is definitely worth it for you – in the end, you will have strengthened your expertise as a product market expert.

Author: Thomas Bauch, Managing Director PM1