HOW LARGE IS THE MARKET?

When making the decision as to whether to enter a new market segment, it is necessary
to know the size of the market as well as to determine its development potential both in
qualitative and quantifiable terms. The size of the market depends on the number of consumers,
their interest in buying, their purchasing power and the access capabilities of your own business.
To this end, the following market variables have to be differentiated:

 Market potential. Market potential denotes the potential capacity of a market for a
specific product or service. It is determined by the number of potential consumers, the
intensity of the need, the market transparency and the marketing policy measures of the
tenderers in the market. Markets that are growing strongly promise large growth rates in
terms of sales because of the unused market potential. Generally speaking, relations
between competitors in such markets are relatively harmonious. In saturated markets,
however, there is usually aggressive competition, since the market can only yield limited
growth rates and since any sales increase brought about by a penetration strategy will be
at the cost of the competitor’s market share. The market potential is useful as an
orientation variable for determining the saturation margin and also the market volume.

 Market volume. The market volume describes the real sales of all those tendering a
product or service type in a given period in a specific market segment. This is the portion
of the market potential that is achieved by the entire sector.

 Sales potential. The sales potential is analogue to market potential and is limited to one
specific business. It specifies the maximum share of market potential the business can
attain. This variable is influenced by the marketing activities of the tenderer and by the
price/performance ratio in comparison with the competition and its behavior.

 Sales volume. The sales volume specifies the total turnover of units sold by the company
over a specific period.

 Market share. The market share of a business is defined as its sales volume in relation to
the total market volume in percentage points. The variable of the market share makes a
benchmark with other businesses possible, thus indicating your own position in the
market.

 Relative market share (RMS). The RMS is the ratio of your organization’s sales volume to
the sales volume of your chief competitor. This variable is of particular strategic
significance when determining potential unit cost reductions through the factor of
acquired experience. In practice, one may assume that the unit cost decreases with
increasing output. This means the RMS can be used as an index for your own cost position
in comparison to that of a competitor.
 Market potential analysis using the market cascade (following Kohloeffel (2000), p.131)

Method
An important factor in the quantification of market potential is the accessibility of markets. The
model of market cascading can be used as a tool for the analysis and derivation of a strategy for
opening markets. On the basis of market potential, one must first determine what share of the
market is inaccessible. Access may not be possible because of, for instance, governmentally
protected monopolies granted to competitors or because product certifications have not been
granted. The remaining accessible market is then to be divided into the served and the unserved
market. Non-served market segments exist for individual businesses because of a lack of market
opening, non-available products and services or because of a non-competitive price/service ratio.
Workshop
The strategy focuses on all stages in the market cascade. In a workshop, questions regarding
development of the potential target market deliver concrete strategic points of attack for
business development.

Tip
Data assessment is necessary for the analysis of market potential. In many sectors, one can make
use of regularly released market research reports from industry groups, marketing research
institutes or information brokers. Furthermore, a market model can be produced based on
assumptions drawn from certain determining variables. For instance, the volume of a market
segment and its further development depend on economic indicators, such as the development
of pro capita income.