What does assessing the market mean? How can you tell how profitable your intended market is?
By assessing the market, you can determine how much profit you can potentially make from selling your product. In The Marketing Plan, marketing expert William M. Luther explains how to conduct a full market assessment by defining your market size and share.
Let’s walk through why assessing the market is important and how to do it.
Assessing the Market Size and Share
According to Luther, before developing a product or service, you first need to assess how profitable your intended market is. He argues that there’s a very high correlation between the size of your target market, your market share, and the amount of profit your product or service can make. Assessing the market will help you determine whether there’s sufficient demand for what you’re offering and how much profit you could potentially make. Let’s explore the correlation between market size, market share, and profits in detail.
Luther explains that market size indicates the total number of potential customers for your product or service—the larger the size, the more potential there is to make a profit. Use the following three-step process to define your market size:
- Consider what benefits your product or service offers. For example, your product helps people whiten their teeth.
- Customer groups turn to a common pool of competitors and distribution channels that offer products that claim to fulfill their needs. Determine your market by finding a group of potential customers who are seeking the exact benefits you’re offering. For example, your product comes in eco-friendly packaging and you intend to sell it only through online channels. This narrows down your target market to a group of people who want whiter teeth, care about eco-friendly practices, and shop online.
- Total the number of buyers in your target market to calculate the market size.
The second step in assessing the market is determining market share. Luther defines market share as the percentage of a target market’s total sales generated by a business. He argues that your business should aim to acquire at least 30 to 50% of your target market to guarantee long-term profits. If you acquire less than 30% of the market, you’re unlikely to make enough revenue to get ahead of your competition and maintain your position. If you attempt to acquire more than 50% of the market, your costs to achieve this may outweigh the amount of profit you can make.
(Shortform note: It’s difficult to confirm whether acquiring 30 to 50% market share guarantees long-term profits. This is because, as Luther states, these profits depend on the size of the market. They also depend on the production cost of your product or service and the price you charge for it. For example, your product costs $10 to produce and your market size totals 1,000 customers. If you price your product at $15, a 30% share won’t generate high profits. On the other hand, if you price your product at $500, you’ll generate substantial profits.)
Luther explains that if you acquire at least a 30% market share, you’ll benefit from reduced costs that strengthen your position in the market. This is because business costs fluctuate in proportion to the volume of products and services produced—the more you produce to fulfill customer demand, the more resources you purchase in bulk, and the less you pay per unit.
This results in savings that you can allocate toward improving business operations—which means you can provide better-quality products and services and more effective customer service than the competition. These savings also mean that you can afford to charge lower prices for your products and services because they reduce your reliance on profits to sustain your business.
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- How to build a team and motivate them to work together
- How to hire the right people—and keep them
- How to share and reinforce your vision