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Effective trading on a national or individual scale would be impossible without effective risk management. The most important quantity characterizing the level of demand for a product or service in a selected niche, determined by the nature of the product, target audience and geographical boundaries, is called market capacity. This concept occupies an important place in the planning and forecasting procedures of a company. Correct calculation of market capacity will help to model the situation regarding the degree of probable influence of the enterprise in its segment of economic relations and formulate a business plan. This is a key concept for both the marketing department and the entire organization as a whole. Data on the value of this indicator are widely used when making management decisions of the company, help determine the strategy of action, and also play a vital role in increasing the scale of activity.
Why do companies calculate market capacity?
To capture a new market segment, at the first stages of business planning, an organization needs to calculate its capacity. With its help, you can easily assess the degree of benefit that an organization can acquire by engaging in a particular business activity.
The essence of this calculation is to determine the projected sales value. As a rule, information for 12 months is taken for calculation. In order to carry out such analytics correctly, it is necessary to take into account the number of companies already operating in a given segment in a specific area, as well as the degree of satisfaction of demand for a similar product or service in the market niche. Without taking into account these indicators, for any organization, the production of a new product will obviously become unprofitable.
In the process of analyzing market capacity, you can determine both the existing value and the possible one. In this case, the second indicator must be greater than the first. As a rule, the calculation of possible sales volumes is made in rubles or tons.
When the value of the existing market capacity is established, the scale of production, procurement and sales is calculated, the size of the customer base, penetration indicators, etc. are determined. For this analysis, you should refer to statistical data, marketing research of your organization, information from open sources, reporting, as well as insider information. information when analyzing competitors. The probable market capacity is a prognostic category, the value of which is determined by the methods of extrapolation and expert assessment.
The value of the possible sales volume has enormous weight in the process of making a management decision about the penetration of an organization into a certain niche of economic relations. As a rule, when calculating the probable market capacity, indicators of its existing size and the potential of the company in its segment are summed up.
A large difference between possible and actual data indicates the potential profitability of working in a particular niche. On the contrary, if during the calculation it was established that this discrepancy is small, then the market is in a state of stagnation. Most likely, in conditions of fierce competition, effective activity in this segment will be impossible, or the resources spent on this project will be incomparable with the profit that it can bring.
Calculating market capacity has the following positive consequences.
By calculating the value of the existing market capacity at a given time, an organization can with a high probability determine its place in the system of economic relations, as well as the relative share of sales occupied by competitors. Moreover, studying the position of rivals is no less important than clarifying your market positions.
By analyzing trends in capacity changes, relatively accurate sales planning and, as a result, the formation of an up-to-date marketing strategy for the enterprise becomes possible.
By using mechanisms for calculating market capacity, the organization increases the degree of accuracy of forecasts regarding future sales volumes of goods and services, as well as the level of effectiveness of advertising campaigns.
Calculation of market capacity and its types
As a rule, three types of market capacity are calculated.
Actual
Existing market capacity is a value characterized by the volume of real demand for a product or service, as well as the purchasing power of the target audience of this product. The determination of this indicator is based on existing information.
Available
Calculating the market capacity of this type is a narrowing of the number of potential buyers to those who would be satisfied with the terms of the transaction with our company and truly interested in our unique selling proposition. When determining this indicator, an important factor is the availability of resources and working capital in the organization to cover the demand for a given product or service.
With this calculation of market capacity, the company limits its sales volumes to the value of the target audience, while cutting off buyers who do not meet certain criteria.
Potential
Probable market capacity - characterizes the share in the overall sales system that an organization can occupy with the highest degree of effort regarding product promotion and high customer demand for a given product or service. The concept of potential market capacity refers to the maximum value that can actually be achieved using all the available resources of the organization.
This is an indicator that characterizes the situation in which an enterprise occupying a certain niche is most likely to use its marketing capabilities in such a way that consumers know and buy goods and purchase services of that particular brand or brand.
Types of market capacity are calculated in rubles, pieces, kilograms, etc. Regardless of the unit of measurement, this indicator is one of the fundamental ones in determining the degree of actual and potential influence of a company in the overall system of economic relations.
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Under capacity market refers to the aggregate demand for products in a certain territory and at the current price level. The concept of market capacity strongly correlates with the concept of “” (you can read about market share in this article -) - the capacity indicator is a divisor when determining market share, to be more precise.
It is these two indicators that allow us to assess the dynamics of ongoing changes and the current situation on the market. It is important to understand that they only work in pairs: share without capacity will give an incorrect (or incomplete) picture, and capacity without share is an indicator that is not related to a specific organization.
How is market capacity measured?
Cost and natural measurement of the indicator is possible. In the first case, the result is expressed in units of goods, in the second - in rubles. The second option is considered more preferable, since the first does not allow assessing the company’s profit. The calculation period is most often a year, because many goods (for example, ice cream) have a seasonality factor - the sales schedule of such goods when calculated, for example, by quarter, will take the form of a sinusoid, therefore, it will be problematic to determine the upward or downward movement.
Calculation technique
Market capacity is divided into two types:
Potential capacity is largely a theoretical indicator and is calculated based on the assumption that the level of consumption is maximum. Real capacity takes into account actual consumption and is used in forecasting. Some sources also talk about accessible capacity - that part that the company has not yet conquered, but can conquer.
Capacity calculation is carried out in the following steps:
- The total potential profit is determined. The formula used for this is:
where KA is the number of audiences, CP is the frequency of consumption, SP is the average price.
Consider the example of cable television.
Territory of consumption – cityN, where 999 thousand people live. There is a small aspect here due to the specifics of the product: they connect one cable TV per household, so we need to calculate the number of households. If there is no information on this indicator (which is quite possible), the Russian average is taken - 3 people per household. Consequently, there are 333 thousand households. This will be the value of CA. Purchase frequency – once a month (the user pays a monthly subscription fee). If we calculate the annual capacity, it turns out that PE = 12. Let’s take the average price of the service as 150 rubles.
How to interpret this figure? Quite simply: if every household decides to install cable television, all providers offering services in city N will be able to earn 600 million rubles per year. Naturally, such a situation is impossible - first of all, because not every consumer needs cable channels.
- Determined real audience. There are several methods for determining it - this will be discussed below. One of the methods is a banal survey. Let us accept the condition for the problem under consideration that, based on the results of the survey, it was determined that 50% of respondents use or wish to use cable television. Thus, the potential audience is 167,000 households.
- The purchase period is determined. With our example, this is easy to do, because a person pays for cable channels once a month. The calculation is much more complicated for bread or, for example, hand cream. In the first case, you have to refer to the standard for consumption of bakery products (there is one - it is 9 kg per month per person), in the second - for packaging and one-time consumption.
- The average check is considered. At this stage, a price cut of competitors is made. Consider the following table:
Conclusion: the average cost of the service is 150 rubles per month. Our example is again quite simple to calculate - in the case, for example, with creams, we have to calculate the average cost per milligram, since the container may not be uniform in capacity.
- The shares of competitors are determined. There are a huge number of methods for obtaining information on competitors’ sales. One of the most effective is considered to be guerrilla, that is, surveying directly employees of a competing company; however, this method requires finding an approach to employees who, as a rule, are aware that their actions can be interpreted as opportunistic behavior and even betrayal. In the case of cable television, it is possible to use a test call, that is, posing as a potential subscriber who is at a crossroads of choice, try to find out over the phone how many people use the services of the provider. Of course, all sources other than the company’s profit and loss statement will provide only very approximate information, however, obtaining accurate data is not the goal of this stage.
- We calculate the actual capacity. Let's say we received the following data:
That turns out to be only 95,000 subscribers. Taking into account the fact that the average price of the service is 150 rubles, the covered capacity is 14,250,000 rubles. The total market capacity is determined as the product of the average price by the number of households that have expressed interest in connecting to cable TV. That is, 150 * 167000 = 25050000 is the real capacity. We can conclude that 10,800,000 rubles (the difference between the actual and covered capacity) is the uncovered part that is still available for capture.
- We calculate the available market share. To obtain information about what share of the uncovered part the analyzed company can still capture, it is necessary to determine the share of the company's existing subscribers in the total capacity. In determining the available share, we assume that the distribution pattern will approximately remain the same. Let's determine the share of existing subscribers: 30,000 / 95,000 = 32%. We calculate the available share: 10800000 * 0.32 = 3456000.
Thus, the available share is approximately 3.5 million rubles, although nothing prevents the company from striving to completely conquer the unreached part.
This video briefly explains how to calculate market capacity:
Methods for determining the real audience
As mentioned earlier, before moving from calculating the potential market capacity to calculating the actual one, it is necessary to draw a conclusion about what part of potential consumers are really interested in purchasing the product (or are already using it). Already here, at the very beginning of the calculations, the company may encounter difficulties, which in the future will force it to abandon the idea of conducting analysis at all. You can calculate your real audience using one of the following methods:
- Surveys and questionnaires. This is cheap and cheerful, but not always effective, since the company risks receiving false information twice. Both the respondent himself and the employee conducting the survey can lie by incorrectly recording the respondent’s feedback.
- Social media. This method is effective only for certain groups of goods, for example, mobile phones or Internet service packages. It is necessary to proceed from the fact that mostly young people have pages on social networks. Researching, for example, the bakery market using this method will be incorrect, since bread is consumed by everyone, from old to young.
- Testing respondents. This method involves selecting consumers (respondents) based on various criteria - family wealth, age - and recording their purchases. It is possible to use special scanner cards: the respondent presents such a card when making a purchase, after which the receipt data appears in the company’s database.
Of the methods described above, the third is the most accurate, however, its use is possible only in those countries where trade automation (presence of pin pads) is at a very high level.
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The article provides complete visual information about how and why market capacity is calculated, and contains theoretical and practical information for independent calculations.
A little theory
Unfortunately, not all entrepreneurs are aware that the development of any business requires a careful and targeted strategic approach. Making decisions blindly can lead to significant financial losses, excess production or lost profits, decreased competitiveness and, as an extreme option, the ruin of the company. One of the main tools for making management decisions is knowledge about the structure and conditions of the market, its capacity. Let's give examples.
Let's say you sell goods for 200,000 rubles per month, and together with your competitors - for 800,000 rubles. But you know that the market can consume goods worth 950,000 rubles, how will you behave in this case? Surely, you will begin an aggressive marketing policy towards other players in order to win the remaining market share?
Another example: your sales are 450,000 rubles/month, and together with your competitors, similar products are sold for 600,000 rubles/month. while the market can purchase a similar product for 1,000,000 rubles. What will you do with this information? Of course, expand production.
Or the third situation: your sales are 900,000 rubles/month, together with your competitors you sell for 980,000 rubles/month, and the maximum purchasing power of the market is 1,000,000 rubles/month. What does this state of affairs tell the manager? - the need to invest stable income from sales in the development of a new product or even business.
To summarize: market capacity is the amount of a product that can actually be sold in a clearly defined market in a specific period of time. Capacity may be temporary
- daily (how much bread can one region buy in a day?),
- monthly or quarterly (how many hairdressing services will the city buy per month?),
- annual (how many tons of confectionery products will a particular region eat in a year?).
And on a territorial basis, respectively, local and niche. Also, market capacity can be potential (the most probable here and now), actual (total sales volumes of all operators) and available (that part of the market that your company can conquer).
Now let’s figure out how to get this valuable information and calculate market capacity.
What data is needed to calculate market capacity?
| Incoming information | Explanations |
|---|---|
| market definition and audience size (KA - number of audience) | Here we determine the territory in which the goods are sold, the number of actual or probable consumers and the form of accounting. For example, goods such as bread, cable television, toilet paper, and televisions are purchased not individually, but for the family, so the market is calculated in households. Personal consumption goods - cosmetics, clothing, piece products and items (bottled beer, cakes, toothbrushes, etc.) are calculated per person. Quantitative indicators can be obtained from free statistical sources. |
| degree of consumption intensity and frequency of purchases (PP - consumption frequency) | The second input figure for analysis is the frequency of purchases of a product in a certain period of time (or, as an alternative, the rate of consumption of a product per person). For example: cable television is paid once a month (monthly purchase), bread - daily, toilet paper - once 2-3 weeks (pack per family), televisions - once every 5-7 years. This kind of information can be obtained based on a consumer survey, generally accepted standards (for example, it is recommended to change a toothbrush every six months) or on an expert assessment. |
| average bill - average cost of a product in rubles. (SP - average price) | Not only your product is taken as a basis, but also the entire competitive line. You can calculate the average cost yourself by receiving the price lists of all competitors. Customer surveys (at what price do you usually buy this product?) are also very effective. |
| average volume and type of product (O - volume) | For example, if we are talking about:
This indicator may not be used in calculations. but it is a kind of criterion for consumption volumes. |
Calculation technique
Step 1: calculate the maximum potential capacity
To calculate the total potential market capacity of your product in a certain region, we use the formula:
Total potential market capacity = KA*PP*SC
Let's look at the example of a cable television provider. Input data:
Considered time interval: quarter;
Considered territorial market: city N with a population of 320,000 people;
Number of audience: 106,000 households (if there is no information on the number of households in your region, you can use Russian population statistics, according to which an average of 3 people live in one house).
Consumption frequency: 1 time per month (subscription fee), respectively, 3 purchases per quarter (if your product is purchased less frequently, then the frequency may not be expressed in whole numbers: an annual subscription to a solarium translated into a quarterly period will have a frequency of 0.25).
average price: 180 rubles
Average volume and type of product: Basic package with 120 channels.
Let's calculate: 106,000 consumers *3 purchases per quarter*180 rub. = 57,240,000 rub. - we got the potential market capacity. i.e., such an amount can be earned by all cable television providers, provided that absolutely all apartments and houses in the city are connected. Now we need to bring these figures closer to commercial realities.
Step 2: determine the audience using the product
We continue to look at the example of the capacity of the market for cable television services in a particular city. We determine the target audience of cable TV services (survey, statistics, observations) and bring it to a certain size.
Let's say, based on the results of a survey, you see that 45% of all respondents living in your coverage area (city N with 106,000 households) use or want to use cable television: (106,000/100)*45= 47,700 households - a quantitative indicator of your market in which all your competitors operate.
Step 3: determine the purchase period
In the case of our example, this period is a month (subscription fee). If you have consumer goods or services, then you should again proceed from the results of a survey of city residents or product consumption standards.
For example, the standard for bakery products per person per day is 300 grams, respectively, per month - 9 kg. Bread is usually bought per family, so one household receives an average of 0.7-1 loaves per day (not everyone eats lunch and dinner at home).
If we talk about cosmetics, then this is an individual product. Eg. Day face cream is usually packaged in 30 ml. One-time use is 0.3-0.5 ml. those. A jar of cream will last a woman for 2-3 months.
Step 4: calculate the average purchase price
To do this, you need to make a price and product range of your competitors.
For example:
We bring the price per ml to our reference jar of 30 ml and see that its average market price is 30 * 2.25 = 67.5 rubles.
Step 5: determine the share of competitors
To do this, it is necessary to conduct a serious study of the representation of competitors and their sales volumes. If we are collecting information for everyday goods, it will be enough to conduct an inventory of competitors' sales points in the city. If these are services, calculate the average flow of clients (observation, survey, purchasing data from employees, control visit). Based on practice, we can say that the simplest and most effective method of obtaining information is guerrilla marketing, or, more simply, questioning competitors’ employees.
For example, a cosmetics manufacturer may instruct its supervisors to measure the availability of competitors' products on shelves or request this information from stores. In the case of cable television, a follow-up call would work well: introduce yourself as a subscriber and ask directly how many people use the services of the provider.
Of course, the numbers will be very approximate, but this is not a problem, i.e. Marker values are needed for calculation.
Step 6: calculate market capacity
To make the description clear, let's return to our cable TV. We have potential capacity, we calculated it by multiplying all households in the provider’s coverage area by the average cost of the package, and we received 57,240,000 rubles or 106,000 subscribers.
Let us remember that this is the absolute maximum of the market, beyond which it will not be able to develop under current conditions. Now let's calculate the actual capacity:
(own sales volume + shares of all competitors).
For example:
- the cable TV provider has 14,000 subscribers in its database (47% of the total volume),
- competitor A - 8,000 subscribers (27%),
- competitor B - 7,000 subscribers (23%),
- small networks - 1,000 subscribers (3%).
Total 30,000 subscribers* average price 180 rubles = 5,400,000 rubles - monthly market capacity covered.
Now consider the survey data, according to which 47,700 households seek or use cable TV services. 47,700*180 rubles (average price) = 8,586,000 rubles. - This full actual (real) market capacity.
We consider: total actual capacity 47,700 - covered capacity 30,000 = 17,700 subscribers (or 3,186,000 rubles, or 37.1%) - this is the uncovered part for which we must fight.
Step 7: calculate the available market capacity
Here we will need information about the share of each competitor. Consider:
In a realistic forecast of available market share, it is natural to assume. that its distribution will roughly correspond to the same pattern observed among competitors, i.e. the percentage share, plus or minus, will remain, which means that cable television providers can count on:
- your company - 8319 subscribers (47% of the total volume),
- competitor A - 4749 subscribers (27%),
- competitor B - 4071 subscribers (23%),
- small networks - 531 subscribers (3%).
8319*180 rub/month = 1,497,420 rub/month - this is available market share, although you can always strive to conquer 100% of the unreached part.
Market capacity (market size) – the size of the market for a particular product or service, expressed in the total volume of sales of the product for the billing period; or the total demand for a category of goods, expressed in the purchasing power of the population. Often in marketing, instead of the concept of “market capacity,” its synonyms are used: market size and volume.
In this article we will tell you everything about the concept of “target market capacity”: we will consider the terms “potential, actual and available market capacity”; we will talk about the main indicators that are used to determine the size of the market; we will describe the factors influencing the capacity of the sales market; We will also describe existing methods for calculating, assessing and forecasting market capacity. The methods for calculating market capacity described below can be used for completely different industries: to determine the volume of both commodity and consumer markets, and for the b2b sector.
Market capacity varies
In global practice, there are 3 types of market capacity: actual, potential and available. Each type of market capacity can be calculated in different units of measurement: TV in physical terms (in pieces), in value terms (in rubles), in volume of goods (in liters, kilograms, etc.).
Let us give a brief description of each type of market capacity.
Potential
Potential market capacity is the size of the market based on the maximum level of development of demand for a product or service among consumers. The maximum level of demand means that the culture of using the product has reached its maximum: consumers consume the product as often as possible and constantly use it. Potential market capacity is the maximum possible market volume, which is determined on the basis that all potential consumers know and use the product category.
Actual
Actual or real market capacity is the size of the market based on the current level of development of demand for a product or service among the population. The actual market capacity is determined based on the current level of knowledge, consumption and use of the product among consumers.
Available
Available market capacity is the size of the market that a company can claim with its existing product and its characteristics (distribution, price, audience) or the level of demand that a company with its available resources can satisfy. In other words, when calculating the available market capacity, the company narrows the actual volume of the market, considering not all market consumers as potential buyers, but only those who meet its target audience criteria.
A small example of different types of market volume
Let's imagine that a company operates in the electric toothbrush market. How to determine the criteria by which companies calculate the size of the potential, actual and available market volume? Let's look at it in detail.
The company should calculate the potential market size based on the following assumptions (the following are the assumptions from the manufacturer that will form the basis for calculating the potential market size; you can include your own assumptions in the calculation that reflect your current assessment objectives):
- All potential toothbrush consumers use “electric toothbrushes” as opposed to regular manual brushes.
- All consumers buy brushes in accordance with the frequency recommended by the manufacturer: that is, they change them regularly, after 1 month of use.
- The average price per brush corresponds to the current average price of the manufacturer.
To assess the actual market share, the company must take into account the prevailing culture of consumption of the product (electric toothbrushes) in the target market. To do this, she conducts a survey among all potential market consumers and clarifies the following indicators:
- Current level of consumption of the category “electric toothbrushes” among the population or What % of all potential market consumers use this type of brush? This indicator is called “category penetration”.
- Current purchase frequency of electric toothbrushes or How many times per year do customers who use electric toothbrushes buy them?
- The current average purchase price of electric toothbrushes.
To assess the available market capacity, the company clarifies the indicators not for the entire market audience, but only for its target segment, which, for example, is young consumers aged 20-40 years.
What input information is needed to calculate market size?
In order to calculate the capacity of the target market, you must first collect the necessary information through market research, and also determine the principles for calculating the capacity. The following questions will help you solve this problem:
| Factors and indicators | Description |
| Period | For what period will the market capacity be calculated (month, quarter, half-year, year), including a year? |
| Market boundaries | For which region will the market share be calculated (USA, Russia, Western Europe, Asia, Far East, etc.)? |
| Criteria for calculating potential | What indicator will be taken as the basis for calculating the potential market capacity - the possible level of production or the possible level of consumption? |
| Audience | Which audience will be taken into account when calculating market capacity (the entire population 18+, women 35-55 with an average income, all people over 55 years old, young families, etc.)? |
| Product groups | What groups of goods will be taken into account when calculating market capacity (using the example of the car market - only cars or cars + spare parts or cars + spare parts + service services)? |
| Unit | What will be the unit of measurement when calculating market capacity (currency, unit of production or volume of production)? |
| Sources | What information is needed to calculate market capacity, sources for obtaining this information? |
Methods for calculating market capacity
There are 3 basic methods for determining the capacity of the target market: the bottom-up capacity calculation method, the top-down capacity calculation method, and the calculation of market capacity based on actual sales. Let us consider each of the methods for assessing market capacity in more detail.
Each method has a universal rule: if the market is divided into several segments or sub-markets, then sometimes it is easier to calculate the capacity of each sub-market and then add it up to obtain the capacity of the entire market.
Bottom-up method
The bottom-up method is the most common way to calculate market size. It determines the market capacity in terms of the current level of demand. Market capacity using the bottom-up method is equal to the sum of all expected purchases of a product by the target audience for the billing period (in practice, it is customary to calculate the annual market capacity).
Calculation formula
If you want to estimate the size of the target market using the bottom-up method, then the following 3 formulas for calculating market size will be useful to you:
| Type of market capacity | Calculation formula |
| Market size in quantitative terms (thousand units) | Market capacity for period N (thousand units) = Number of target market audience (thousand people) * rate of product consumption for period N (in units) |
| Market size in monetary terms (in thousand rubles) | Market capacity for period N (thousand rubles) = Number of target audience of the market (in thousand people) * rate of consumption of goods for period N (in units) * average cost of 1 unit of product on the market (in rubles) |
| Market size in volume terms (thousand liters) | Market capacity for period N (volume units - thousand liters) = Number of target audience of the market (in thousand people) * rate of consumption of goods for period N (in units) * average volume of 1 package of goods (in volume units - liter) |
You can read a more detailed example of calculating market capacity using the bottom-up method in our article
Top-down method
The method involves determining the market size based on internal sales data of all market players for the calculation period (if it is impossible to cover all players, it is enough to take only large ones, constituting 80-90% of market sales).
The formula for calculating market capacity using the top-down approach is as follows:
Market capacity = The sum of sales of all companies on the market, expressed in selling prices to the buyer (i.e. not in shipping prices, but in retail prices).
Information can be obtained as a result of a survey of major market players, as a result of open reporting published by players in some markets.
Method from real sales
This assessment is currently used by many research companies, such as ACNielsen. The essence of the method is to track sales of individual categories of goods using real customer receipts, which represent real purchases to the audience.
This method uses only large chain stores with which agreements are concluded to provide data and these stores are used as a representative sample. As a result, the data obtained can be extrapolated to the entire country.
In this method of determining the market volume, it is impossible to isolate a separate audience, but it is possible to realistically estimate: how many pieces of individual types of goods, at what prices, in what volume were sold on the market during the billing period. And the universal technique allows you to analyze information in dynamics.