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Do You Have a Market Opportunity?



Of the 20 million or so businesses in the US, and millions more around the world, surprisingly the majority of them don't actually want to grow beyond their current size, according to a study by Erik Hurst and Benjamin Pugsley of the University of Chicago. (You can find the study here.) But if you're like the rest, you have a dream or vision of success that often hinges on the existence of a market opportunity that you can tap, or a need you think you can fulfill.

Classical Keynesian economics provides a simple way to tell you whether you have a market oportunity or not. So if you're contemplating investing in growth, you can use the model below to see if it's worth your while.

Step 1: Estimate the Size of the Market

The first step in determining if there's an opportunity is to estimate the total size of the market you want to go after. This data is often freely available from the government, investment sites, or business publications.

Estimate your Total Market Size, and the Addressable Fraction, by replacing the numbers in the tables below (without commas) with those that reflect your best guess as to your target market's size, and your view of what fraction you can legitimately can go after.


Step 1: Enter Your Market Size
Total Market Size $
Addressable Fraction  %
Addressable Market Size $ 10,000,000

Table 1: Estimate Your Target Market's Size and the Addressable Fraction


After you enter these figures, go on to steps 2, 3 and 4, where you'll submit all your data to re-calculate the result at once.


Step 2: Estimate the "Price-Elasticity-of-Demand" for Your Product, and How Your Costs Vary by Volume

The next step is to estimate the share of the Addressable Market (which will be re-calculated above) that you would expect to get, based on your price. To do this, you enter "price-demand" pairs in columns A and B, from lowest to highest, in the table below.

In brief, a "price-demand" pair attempts to answer the question "For a given price, what market share would you expect to get?" (Are memories of Econ 101 coming back?)

For most companies, the lower is your price, the higher will be your market share. However that may not always be the case. For example, a higher price might enable you to increase your market share by adding features or benefits, or positioning you better. Just make sure your prices are in lowest-to-highest order from top to bottom. If you don't know the exact relationships, just take your best guess.

Once you've populated columns A and B, enter your average unit cost at each price-demand level in column C. In reality, your costs may or may not vary by volumne; but this gives you the opportunity to reflect the idea that your costs may be higher or lower for different volumes, depending on quality, production efficiencies, capital requirements, buying power, etc.

Step 2: Enter Your Price/Volume Matrix
  (A)
Market Price/Unit
(B)
Market Share
(C)
Your Unit Cost
Lowest Price $ % $
  $ % $
  $ % $
  $ % $
  $ % $
  $ % $
  $ % $
  $ % $
  $ % $
Highest Price $ % $

Table 2: Price Elasticity of Demand (A & B)
and Costs by Volume (C)


Be sure to populate all ten rows for all three variables above. If you don't have ten possible price levels, either interpolate or extrapolate to fill all the rows and columns. For example, you could show 100% market share below some minimum price, and 0% market share above some maximum price; or you could use smaller price increments. (It's starting to come back to you, isn't it?)

Step 3: Enter Your Price

You can now test the effect of going to market at different prices. To do this, enter your desired price below to see its impact on your sales, your market share and your profitability.

Step 3: Enter Your Price
Price
$

Table 3: Your Price

Keep in mind that the price you enter above should fall between the minimum and maximum prices you entered above in column A from Table 2.


Step 4: Run the Model

Click below to update your results. If you've populated all the cells, the analysis will appear below.

Step 4: Run the Model




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