Bruce Clark wrote a LinkedIn post titled How to Estimate Market Potential.
« Broadly, there are two ways to build an estimate of market potential: top-down and bottom up. »
« Top-down Estimation…
- As of 2018 the World Health Organization estimates that some 15 million Americans suffered disabling hearing loss. If all these people would benefit from hearing aids and people replace their hearing aids once every five years, that suggests 3 million pairs per year for this cohort.
- As of 2017 the American Pet Products association indicates Americans own 94.2 million cats as pets. If you’re selling a cat toy that lasts six months, that’s a maximum potential of 188.4 million units per year.
In reality, of course, no one would come close to those numbers, but it’s a place to start. Better top-down analyses winnow down the (typically large) initial number to a more realistic estimate by either eliminating obvious non-customer populations or emphasizing populations that will find your product attractive…
This often gets summarized in a multiplicative or “chain ratio” model:
15 million people X 20% replacement rate X 40% can afford X 60% are dissatisfied = 720,000 potential pairs in a year »
« Bottom-up Estimation…
More broadly, you can think of creating indices of potential in particular markets, using either a current market or the market as a whole to represent a baseline. For example, suppose you’ve been selling a new craft beer in Chicago. As of 2017, the Community Expenditure Survey from the Bureau of Labor Statistics indicates that the average Chicagoan spends $509 per year on alcoholic beverages. If we call Chicago the baseline (= 100) we can then array other cities in their spending relative to that baseline. The same survey indicates average spending in Minneapolis-St. Paul is $754. $754/$509 = 1.48, or 148 as an index number. Index numbers can be useful in projecting the market potential in particular segments; as Minneapolis indexes high for alcoholic beverage consumption, it may be a good market for your Chicago beer. »