Contents
- What is market capacity
- How market capacity is measured
- Types of market capacity
- Why market capacity assessment is important
- How market capacity influences business strategy
- How to calculate market capacity
- Where to get data for market capacity assessment
What is market capacity
Market capacity is a key metric indicating the volume of a product that can be sold in a specific segment over a certain period. For entrepreneurs, this information is critically important as it allows them to assess the future financial prospects of the business: how much can be earned and whether it is worth investing in a particular idea. Market capacity can be expressed in various units: in monetary terms, number of buyers, or volume of goods to be sold.
For example, consider a resident of Yekaterinburg who purchased a "Tesla" car. Despite his satisfaction with the purchase, he faces service issues: local mechanics do not have the necessary knowledge and experience working with such vehicles. Inspired by this situation, he decides to open a specialized service for "Tesla" owners. However, if there are only two such cars in Yekaterinburg, the market capacity will be extremely low, and investments in the business are unlikely to pay off.
How market capacity is measured
There are several methods for measuring market capacity, which can be divided into two main approaches:
- In product units: This estimate shows how many units of a product, such as bread or taxi services, need to be produced to meet market demand.
- In monetary terms: This method allows for estimating the profit that can be obtained from selling goods or services. A higher market capacity in monetary terms usually indicates greater profit potential for businesses.
Types of market capacity
When assessing market capacity, three key types can be identified:
- Total Addressable Market (TAM): This is the maximum number of goods that can be sold if every potential consumer decides to make a purchase. This figure is theoretical and depends on various assumptions about future trends.
- Serviceable Available Market (SAM): This indicator reflects the amount of product that was actually sold in the market over a certain period. This is the most accurate metric of the three.
- Serviceable Obtainable Market (SOM): It shows how much product a specific company can sell, taking into account its positioning, marketing strategies, and other factors.
Why market capacity assessment is important
Assessing market capacity allows entrepreneurs to make informed decisions on several important issues:
- Investment optimization: Entrepreneurs can determine how many employees to hire at the initial stage, whether to invest in their own equipment or rent it, and how long they can operate without profit.
- Attracting investment: Investors look for high-return opportunities. If the market is too small, they may not consider the project attractive.
- Choosing a growth strategy: Market capacity assessment helps existing companies make decisions about entering new markets or closing unprofitable segments.
How market capacity influences business strategy
An example of successful strategy selection is the "Doner 42" chain, which decided to focus on opening new locations in St. Petersburg. The company's CEO, Oktavian Nizamov, explained that the size and capacity of the market allow the company to become a noticeable player in the region in a short time, unlike similar efforts in larger cities like Moscow.
How to calculate market capacity
Market capacity can be measured in several ways. The main methods include:
- Bottom-up: This method is based on per capita consumption data multiplied by the number of target consumers.
- Top-down: This approach uses available analytical data and reports from large companies to estimate the overall market volume.
Where to get data for market capacity assessment
For accurate market capacity assessment, the following data sources can be used:
- Rosstat data;
- Research from analytical agencies;
- Consumer surveys;
- Search query statistics;
- Sales data from companies.