What is Sales Potential?

Sales potential is the estimated amount of sales a company can achieve for a specific product or service within a defined market and time frame. To make this projection, it considers factors like market size, product performance, buyer demographics, competition, and the company’s own capabilities.

For example, if a company operates in a market with a total potential of $100 million and estimates it can capture 10% of that market, its sales potential would be $10 million. That estimation helps the plan their production, marketing strategies, and sales efforts based on achieving that objective.

It’s important to distinguish between sales potential and market potential. Market potential represents the total possible sales for all companies within a particular market — it represents the overall demand for a product or service. In contrast, sales potential is specific to an individual company and reflects the portion of the market potential that the company aims to capture.

Synonyms

• Sales projection
• Sales capacity
• Potential sales

Understanding Sales Potential

The reason to measure sales potential is that it gives you the ability to evaluate your product’s market performance and estimate the number of units that can possibly be sold.

Accurately doing so helps you:

• Prevent understocking
• Assess market opportunity
• Benchmark actual sales against potential sales
• Determine whether you should enter a new market
• Formulate long-term strategies, like market expansion or product development
• Set sales goals (particularly in lieu of historical sales data if you’re a newer company)

When you know how much money you’ll have coming in (i.e., from projected sales), you can also plan investments. Or, you can take that info and present it to investors to show them why you need money, how much you need, and what it will support.

It also helps you understand how your product is performing in the market overall. If it’s a general product but has a smaller market share with limited sales potential, for example, it could indicate a problem with the product itself. So, these projections can also spur internal investigation that ultimately leads to product improvements.

Key Elements Impacting Sales Potential

Market size, consumer demand, the current competitive landscape, and the overarching economic conditions are the main factors influencing your company’s sales potential.

Market size

A larger market size indicates a broader customer base, offering greater opportunities for sales and revenue generation. A smaller market does the opposite — it limits the potential customer pool, thereby constraining your sales potential.

This is also where economies of scale come into play. In expansive markets, companies can achieve higher production volumes, which leads to economies of scale. This results in lower average costs per unit, enhancing profitability and competitive pricing strategies.

Consumer demand

High consumer demand typically leads to increased sales volumes, which directly boosts revenue. But it’s also important to analyze the type of demand. For example, if your product is in high demand but only during certain times of the year, your sales potential is limited by seasonality.

Understanding consumer demand can also guide your pricing strategy. Inelastic demand (where demand doesn’t change significantly with price changes) allows for higher pricing without losing customers, while elastic demand requires competitive pricing to attract buyers.

Market demand’s impact on your sales potential also has further-reaching implications for product development, inventory management, marketing, and expansion initiatives.

Competitive landscape

In competitive markets, sales potential is generally lower because barriers to entry are higher, estamblished competitors may simply lower their prices, and product differentiation is more important. A thorough analysis of your competitive landscape will help you identify your unique value proposition and differentiate yourself from your competitors.

Through this process, you’ll also get an understanding of your competitors’ market positions. Doing so before determining a price and marketing your product will help you maximize your potential by giving you the info you need to capture buyers whose needs aren’t being met with current solutions.

Economic conditions

Inflation rates, employment levels, and consumer confidence directly impact your buyers’ purchasing power and, by extension, spending habits. During economic downturns, they’ll reduce discretionary spending, leading to decreased sales if you’re selling a non-essential good or service.

You also have to consider cultural, social, and technological changes that can affect how well your product will sell in future years. And you have to pay attention to laws and regulations (e.g., new trade policies or environmental standards) — things that can affect your ability to sell profitably and efficiently.

Strategic approach

In addition to the abovementioned market factors, it’s worth mentioning sales potential is an estimation based on how much of your product or service you could sell if all the market conditions were ideal. Your ability to achieve that ultimately comes down to your sales strategy — the channels you use, how well you execute on them, and how you measure results.

To maximize your sales potential, you’ll need to consider a variety of factors such as pricing strategy, target market segmentation, and distribution channels. You’ll need to study your competitors, how best you can reach them, and what messaging would resonate with them.

Sales Potential vs. Sales Forecast

While both sales potential and sales forecasts are calculated in a similar way, there’s a clear distinction between the two:

Sales potential defines the theoretical maximum sales achievable under ideal circumstances, while a sales forecast provides a realistic estimate of expected sales based on current conditions.

A forecast is a practical estimate that considers your company’s existing resources, capabilities, and constraints. While sales potential is used for strategic planning and market opportunity assessment, sales forecasts are utilized for budgeting, resource allocation, and setting realistic sales targets.

Typically, a company’s sales forecast is lower than its sales potential. This discrepancy arises because, in reality, companies face limitations such as production capacity, distribution networks, financial resources, and market competition, which prevent them from fully realizing their sales potential.

TL;DR: Use sales potential to assess broader market opportunities, and sales forecasts to create plans, set achievable targets, and estimate future sales based on current conditions.

Importance of Sales Potential for Businesses

Understanding your sales potential is an important stepping stone for several strategic decisions within your company.

It can help you figure out:

• Which products have the most potential, and which have the least
• The maximum profit you can make with your current margins and economies of scale
• Markets with the highest propensity for growth
• The sales potential of different customer segments
• Potential expansion opportunities (e.g. new markets, channels)
• Budgeting and resource allocation decisions
• How to optimize your sales and marketing strategies

If you’re a startup pitching to investors, it’s also a way to communicate to them why you think your business has a promising future. If you can prove to them you can generate profits and sell into a large enough market, they’re going to be a lot more likely to invest in your company.

Plus, you can use it as a retrospective measure of performance. Once you’ve analyzed your sales potential, you can use it as a benchmark against your actual performance. That way, you know how well you’re actually doing vs. how well you could be doing — if there’s a huge gap, you need to be more aggressive with your approach.

Calculating Sales Potential

Calculating your sales potential is a bit difficult because it relies on estimations of things like the number of potential customers in your market and their purchasing capacity.

While there isn’t a one-size-fits-all formula, several key metrics and approaches can help in this estimation:

Average sales volume

Sales volume equals the amount of products you’ve sold in a particular period, let’s say a month. Average sales volume takes the average of this amount over multiple periods (e.g., a year). This smooths out any irregularities, like seasonal differences in demand.

• First, define the time period (we recommend using a 12-month period).
• Collect the total number of units sold for each time interval within the chosen period.
• Divide the total number of units sold by the number of time intervals.

For example: If you sold 1,000 units in 2022 and 1,500 units in 2023, your average sales volume over the two years would be (1,000 + 1,500) / 2 = 1,250 units.

Market penetration rate

Your market penetration rate is the percentage of potential customers that a company has converted into actual customers within a specific market.

• Identify the total number of potential customers in the target market.
• Determine the number of customers currently purchasing your product or service.
• Divide the current customers by the total potential customers and multiply by 100 to get the percentage.

For example: If there are 10,000 potential customers and 1,500 are purchasing from you, the market penetration rate is (1,500 / 10,000) * 100 = 15%.

Customer purchasing capacity

This one is a bit more complicated because it’s qualitative, but you have to make it quantifiable. It’s the max number of purchases your target customer is willing and able to make in a year.

• Group customers based on shared characteristics such as demographics, income levels, purchasing behaviors, or business size.
• Examine past transactions to identify spending patterns, average order values, and purchase frequencies.
• For individual consumers, evaluate their income after taxes and essential expenses to gauge available spending power. For corporate clients, consider their annual revenue or budget allocations relevant to your offerings.
• Account for external factors like economic trends and inflation rates.
• Determine the proportion of a customer’s total spending within your product category that is directed towards your business.

For example: Suppose you operate in the consumer electronics industry, targeting young professionals with disposable incomes above $50,000 per year. To estimate their purchasing capacity:

• Average disposable income: $60,000
• Estimated % allocated to electronics: 5%

Purchasing capacity = $60,000 × 0.05 = $3,000 per customer annually

Competitor growth rates

Calculating a competitor’s growth rate requires you to estimate the rate at which their key performance metrics (revenue, market share, or customer base) are increasing over a specific period.

You can find this info in:

• Annual reports (if they’re a public company)
• Market research reports
• Press releases and news articles

From there, use the following formula to determine the growth rate over a specific period:

Growth Rate (%) = [(Ending Value - Beginning Value) / Beginning Value] × 100

Or, for growth over multiple years, compound annual growth rate (CAGR) provides a smoothed annual growth rate:

CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] - 1

Example Sales Potential Calculations

There’s an easier (albeit less granular) way to calculate this metric:

Sales Potential = Target Market Size x Market Penetration Rate x Purchase Price

1. SaaS product

Let’s say a company sells a SaaS product — a video editing software targeting young creatives aged 18-30. To estimate the sales potential, they analyze the following data:

• Target market size: 500,000 individuals
• Market penetration rate: 15%
• Average annual subscription price: $100

Then…

500,000 (Target Market Size) × 15% (Market Penetration Rate) = 75,000 customers

And…

75,000 customers × $100 (Average Annual Subscription Price) = $7,500,000

2. Consumer electronics product

Let’s say your company plans to launch a new smartwatch with all kinds of special fitness tracking features. You want to test it in Colorado — a state with a population of ~5.878 million.

To estimate the sales potential, you analyze the following data:

• Total population: 5,878,000
• Percentage of population who report some kind of physical activity: 75%
• Expected market share: 10%
• Average selling price: $300

Then…

5,878,000 (Total Population) × 75% (Percentage of Active Population) = 4,408,500 potential customers

And…

4,408,500 potential customers × 10% (Expected Market Share) = 440,850 potential smartwatch sales

Finally…

440,850 potential smartwatch sales x $300 (Average Selling Price) = $132,255,000 estimated sales potential in Colorado

Forecasting Tools for Sales Potential

As far as reliable estimates are concerned, the number-one consideration is the accuracy of your data on market size, demographics, and consumer behavior. If your measurements aren’t precise, then your sales potential forecast will be off the mark by an even bigger margin.

Some tools you can use to gather data and make more accurate sales potential estimates include:

CRM software

Most major CRM software systems, like Salesforce and HubSpot, offer forecasting tools that can help you estimate your sales potential. They’re also the source of all your sales data (including some of the most important numbers for estimating sales potential, like AOV and conversion rates).

With a CRM system, you can track your sales cycle, monitor deal status, and gather data on your customers’ buying habits. You can use this info to create a more realistic sales potential estimates, since you’ll have a clearer picture of who’s actually buying from you and why.

Business planning software

Business planning software like Anaplan and LivePlan allow you to create detailed financial forecasts and projections based on your market research, industry trends, and competitive analysis. Within these tools, you can even create and evaluate different market scenarios, assessing how pricing strategies, marketing campaigns, or economic shifts could affect your sales potential.

Market research surveys

Market research surveys allow you to directly ask potential consumers about their preferences, needs, and purchasing power. Since the rest of your target market is like them, you can use their answers to extrapolate broader insights about the market in general.

Census data

Census data tells you a lot about population demographics. It doesn’t provide specific insights about your potential customers’ buying behaviors, but it might give you an idea of the overall size and makeup of your potential market.

Industry reports

Most industries have research firms that track trends, growth, and sales potential. These reports can give you a sense of market size, competitive landscape, and upcoming opportunities or challenges. You can factor these into your estimation, or use them as additional context for your decisions.

Competitor analysis

Since your competitors’ market positions and share of the total are such critical components of the equation, you have to conduct a thorough competitor analysis before making any projections about your sales potential. Identify who they are, what they offer, and how they reach their target market. From there, map everyone out to understand where you fit in and how to differentiate yourself.

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