Estimating Your Potential Customer Base

Last Updated May 8, 2007 3:50 PM EDT

It's important to find out the potential of your business to generate revenues and profits in a chosen market sector. That's what thorough market research is designed to determine. The better the data you have about your market, the better equipped you'll be to make informed decisions about your business. Good market research will help you establish the most important objective of all: your sales targets. Your investors, lenders, business partners, key staff, and other stake holders also have a vested interest in your sales potential and the market share you believe you can realistically achieve.

Before you can estimate the share of the market you want to attain, you first need to research the overall size of the market—the number of customers and potential customers, the aggregate total of annual sales dollars spent, the number of competitors already present, and the market's long-term outlook. This article will help you do that.

What You Need to KnowWhat should I know about potential customers?

As much as possible! However, assuming you already have accurately profiled the customer group you consider to be your ideal target market, you also need to know how many existing and potential customers are in this group and how much they currently spend in a given year.

What do I need to know about competitors?

Several things: how many there are, how successful they are, if there are other businesses entering your desired market, if competitors are leaving a given market (and, if so, why) whether a new product or service could suddenly render all others obsolete (including yours). Properly conducted, market research can tell you. Knowing where competitors do business can be important, too. It's no accident, for example, that auto dealers tend to locate in the same vicinity: more potential buyers congregating in one location means more sales opportunities for everyone.

What else should I know?

Once you have found out how many potential customers you have, and how much they currently spend, you next need to determine if your market is growing, declining, holding steady, or even becoming dominated by a few powerful businesses. Market research also can identify critical external influences—technological developments, for example, or government actions that can influence a market, sometimes dramatically. With this information in hand, you then can decide what sales goals are realistic and attainable.

What to DoCount the Number Of Potential Customers

Your target audience will be comprised of groups of businesses, groups of individuals, or both. Calculating the size of this overall market—the number of people who could buy from you—first requires knowing who these groups and individuals are, where they are located, and their distinctive or unique characteristics. For example, if you plan to open a restaurant or sandwich shop, it would be good to know how many people live and work within a five- or 10-mile radius of your location, since it's reasonable to assume people generally will travel only certain distances to dine out, especially at lunchtime. The same logic applies to opening a grocery or convenience store. For other services, distance is not an issue, but other factors might be, such as technology, or certain natural resources.

Whatever your business objective, you need to know if location or proximity is a critical factor in attracting a target audience. This will help you to scope the potential size of your market, especially as you study your customers' buying characteristics. Such knowledge enables you to tally the number of customers you think your marketing can reach.

Research How Much Customers Spend

Establishing the number of potential customers is only part of the equation. You also need to know how much these customers are prepared to spend on the product or service you plan to offer, as well as how frequently they buy it, and if it is a seasonal purchase—candy for Halloween, the holiday season, or Valentine's Day, for instance.

Just knowing your market size is meaningless unless you can attach a value to the volume of potential buyers you have. That value is just as meaningless unless you understand the repeat purchase rate: how often customers buy or use your service in a given week, month, or year. This information is vital in forecasting sales revenues for your business plan and annual budget.

Determine Where the Market Is Going

Next, you need to look at your market potential. In six or 12 months' time, will it be bigger, smaller, or the same size? Look at trends, too, to see if they suggest your customers will be spending more, the same, or less. It's also quite possible for market research to accurately predict whether your type of product or service will become more popular than one offering similar benefits—an iPod instead of a Walkman, for instance—or if the same number of buyers will soon want to own more of what you'll be selling; cell phones are a prime example.

There may also be other target audiences with similar buying characteristics and needs that your marketing efforts will be able to attract. Don't become preoccupied or obsessed by the current size of your market; you're apt to miss opportunities to reach a wider audience in a year's time without even realizing it. Just as important, watch out for, and act on, signs that the number of customers is falling or that they're buying less frequently. Don't ever leave a market too late.

Combined with the knowledge gained from other steps, a market's trend will enable your business to set its desired market share; prepare the precise marketing strategy, tactics, and budget you'll need to achieve it; and select the channels you will use.

Know Thy Competitors!

Never take your eyes off the competition. By knowing what it is doing, you can learn some new thing, and improve existing practices and tactics. Indeed, the accepted business discipline of benchmarking is based entirely on copying the competition.

If your market is growing, competition will likely grow, too, and become more intense with time—all the more reason to keep on top of trends and try to predict whether your competitors will have new and more innovative products and services than yours. Especially keep a close eye on such competitors' activities as special promotions, free gifts, guarantees, after-sale services, and the like. They can put your business at a disadvantage and cost you a share of the market you have targeted or have already established.

Continue to Research

Market research should never end, and need not end, since information is readily available—including scores of e-mail services and newsletters. Some is free, but expect to pay for more in-depth statistics, trends, and forecasts. The reference section of a public library should have business information with published market reports on hundreds of sectors. It will also have government statistics and documents, trade magazines, and national and local business directories. If the publications themselves are not available, a directory of them should be, along with details of their costs and how to obtain them. A public library will have numerous books, too.

Contact your local chamber of commerce or economic development agency if you want local population or business information, including data about new businesses, expanding businesses, or incentive programs.

The Internet is another good place to start, but it can be overwhelming. Wading through the sheer volume of information available can take hours, if not days, especially for the less-experienced web surfer. Even so, logging onto a major search engine and using market sector, product names, geographic areas, suppliers' or competitors' names, and similar key words as the basis of a search should harvest a wealth of relevant web sites.

What to AvoidYou Don't Keep Current

Be absolutely certain that the market data you rely on are based on current information and trends. Making decisions based on outdated information, or failing to spot sector trends, all but guarantees that you'll either miss opportunities to boost your share of the market or that your competitors will steal some of your existing share. Remember: It's easier and cheaper to retain current customers than to get new customers.

You Research Irregularly

Research regularly: It shouldn't ever be a one-time exercise! If you don't keep tabs on what's happening to the size and structure of your market, you'll lose touch with your existing customers and miss chances to attract new ones.

You Fail to Spot Trends

Don't forget to look continually at the big picture of your sector, rather than just one particular aspect or its relative statistics. Trends to study include potential customers, the average value of their purchases, and how often they buy. Keep an eye out for new entrants in your marketplace and the share of the market they are trying to capture.

You Think It's Fail-Safe

Market research isn't infallible, so don't assume that it is. New products especially can fly under the proverbial radar screen—often because they're so new it's difficult to predict their popularity. It's laughable now that established companies arrogantly dismissed the potential of a new office machine a generation ago. The machine? The Xerox copier.

Where to Learn MoreBooks:

Marconi, Joe. Creating the Marketing Experience: New Strategies for Building Relationships with Your Target Market. South-Western Educational, 2005.

Mazur, Laura and Louella Miles. Conversations with Marketing Masters. Wiley, 2007.

Web Sites:

FXI Research: Global Markets Analysis, Forecasts and Ratings: www.fxi-research.com

Latest Marketing Information from KnowThis.com: www.knowthis.com