A new project or business direction can fail if its prospects are not assessed. Market capacity analysis will help clarify the situation.
What is market capacity and why is it important to calculate it?
What is the difference between market capacity and market volume?
How is market capacity measured?
Types of market capacity
How to determine market capacity
What data is needed to calculate market capacity?
Expert advice
Read Also:Laser Technology Applications – A Cutting-Edge Guide
What is market capacity and why is it important to calculate it?
Table of Contents
Market capacity is the potential volume of goods or services that can be sold in a specific market over a certain period. For example, the company “Juice” plans to produce juices and wants to find out what quantity and amount of sales it can expect in the Central Federal District. Let’s assume that 39 million people live in the region, each of whom consumes 15 liters of juice per year. It turns out that, without taking into account competition, it is possible to sell 585 million liters per year:
15 liters x 39 million people = 585 million liters
And if we take into account that in European countries the consumption level is 30 liters per year, then we can expect a larger sales volume.
There are three situations when a company’s marketer needs to calculate the volume and capacity of the market:
1. Understand whether the business should enter the market.
For example, the Milka company produces only dairy products and decided to produce smoothies. But this is a completely different product: in terms of raw materials, production technology and, possibly, the target audience. In such a situation, the marketer needs to understand whether there are competitors, who the target audience of the new product is, what is the growth potential, whether there are prospects for entering the market.
2. Find out whether it is worth launching a new direction.
The Milka company produces only milk and plans to expand its range – to produce fruit curd. In this case, the marketer’s task is to understand what market share belongs to competitors, whether the company has potential for growth.
3. Understand how to operate in conditions of market stagnation.
The company “Pyshka” produces bread and notes a decrease in demand: buyers prefer crispbreads and other alternative products. In this situation, it is important for marketers to analyze how the company should behave in such conditions: continue to produce bread, change the range towards healthy lifestyle products, or reorient production to other types of products, such as ready-made food. Analysis of the market volume and capacity will help assess the potential and opportunities for development.
Without calculating the market capacity, it will be impossible to launch a new product or increase sales of an existing one. You can understand the basics in the free course “Analysis and assessment of the market”. Here, students learn to use marketing research, calculate the necessary indicators and analyze the market using different methods.
What is the difference between market capacity and market volume?
If market capacity is a potential value, then market volume is what is already produced and consumed.
For example, according to research, 87% of the Russian population uses hair shampoos. As of January 1, 2023, 146.14 million people live in the country, which means that 127.14 million use shampoo:
146.14 million people x 87% = 127.14 million people
Now let’s find out how many liters of shampoo this number of people consume. On average, one bottle of 250 ml is enough for 1.5 months. It turns out that one person uses 167 ml per month, or 2.004 liters per year:
250 ml / 1.5 months x 12 months = 2004 ml per year = 2.004 l per year
This means that the market volume will be:
2.004 l x 127.14 million people = 254.78 million l per year
How is market capacity measured?
There are three main indicators that calculate the potential market capacity:
1. Audience size
This is the main indicator if a marketer needs to assess the potential for product consumption. For example, a company produces hair shampoos and sells them only within the Central Federal District. In this case, the potential audience of the product is all people over three years old, excluding bald people.
2. Physical expression
Market capacity can be calculated in pieces, liters, kilograms or kilometers, depending on the product. For example, bricks are calculated in conventional units, beer in hectoliters, cable in kilometers, and bakery products in pieces. It is important to estimate market capacity in physical terms in order to correlate it with the production and logistics capabilities of the company.
3. Monetary expression
This assessment helps to predict the potential volume of the company’s revenue. Market capacity is calculated in the currency in which they sell or export: for example, in rubles, dollars, yuan.
It is important to evaluate the market capacity in several indicators: in physical and monetary terms. This will help to correctly build production and sales plans.
Types of market capacity
In marketing, there are three types of market capacity: potential, actual, and available. They can be measured in consumers, in kind, and in money terms.
TAM (from Total Addressable Market)
is the potential final capacity of the market, that is, all people who could theoretically consume the product.
SAM (from Serviceable Available Market)
is the actual market capacity, i.e. consumers who actually need the product and who can buy it. Therefore, the actual capacity is always less than the potential capacity. Snow blowers are bought by people with above-average income. To determine the actual capacity, you need to multiply TAM by the percentage of such buyers.
SAM shows the number of customers in all regions where a snow blower might be needed. But what if the company operates in a narrow market — for example, only in the Central Federal District? You need to go down one level and estimate the available capacity.
SOM (from English Serviceable Obtainable Market)
is the available market capacity, that is, the actually available volume of the audience that needs the product and can buy it. For example, a company produces no more than 1,000 snow blowers per month and sells them only in the regions of the Central Federal District. To find out the available market capacity, you need to multiply SAM by the percentage of such buyers.
Any type of market capacity is an inconstant indicator. A company can grow, open branches and expand its regions of presence – in this case, the capacity will increase. And vice versa, this indicator decreases when a business leaves a part of the market or narrows the target audience of its product.
How to determine market capacity
There are two approaches to calculating market capacity: “bottom-up” and “top-down”.
“From the bottom up”
With this approach, you need to start from the audience, and the marketer needs to understand the niche and segment in which the product is sold, know the average bill size. For example, the company “No Hair” produces inexpensive women’s hair removal products. The marketer’s task is to draw up a sales plan and a strategy for promoting the company on the market in the Central Federal District. To calculate the market capacity, you need to:
1. Determine the parameters for calculations:
1.● the size of the female population in Russia and the Central Federal District,
2.● the share of the target audience,
3.● the frequency of consumption of depilatory products,
4.● the volume of consumption of depilatory products,
5.● the average cost of the product in rubles.
2. Collect data:
● According to Rosstat , as of January 1, 2022, there are 77.9 million women living in Russia, including 21.1 million people in the Central Federal District.
● We will consider the target audience to be only able-bodied women aged 16–54. In the Central Federal District, this is 10.74 million people.
● Active buyers, that is, the actual audience, are working women aged 25–45. There are 5.87 million of them in the Central Federal District.
● We will narrow the target audience, since the manufacturer only works in the mass segment. The share of buyers with low and middle incomes is 81.7%, and about 20% of women actively use depilatory products.
● The instructions for depilatory products indicate that they should be used no more than once a week. Let’s assume that each woman from the actual target audience buys the cream once a month, or 12 times a year.
● The average price of a 100 ml package of cream is 185 rubles.
3. Calculate the market capacity in the audience
Number of people
Potential audience
10.74 million x 20% = 2.15 million people
Residents of the Central Federal District × the proportion of those who use depilatory products = TAM
Actual audience
5.87 x 20% = 1.17 million people
Active female buyers in the Central Federal District x share of those using depilatory products = SAM
Available audience
1.17 million people x 81.7% = 0.96 million people
SAM x share of low- and middle-income shoppers = SOM
4. Calculate the market capacity in physical terms (in units per year).
To do this, you need to multiply the number of potential, actual and available audiences by the consumption rate of the product per year.
Quantity in pieces
Potential capacity
2.15 million people × 1 pc. × 12 months = 25.8 million pcs. per year = TAM
Actual capacity
1.17 million people × 1 pc. × 12 months = 14.1 million pcs. per year = SAM
Available capacity
0.96 million people x 1 unit x 12 months = 11.5 million units per year = SOM
5. Translate the data into monetary terms
To do this, you need to multiply the number of potential, actual and available audiences by the average cost of one unit of production.
Capacity in rubles
Potential capacity
25.8 million pieces x 185 rubles = 4.8 billion rubles = TAM
Actual capacity
14.1 million pieces x 185 rubles = 2.6 billion rubles = SAM
Available capacity
11.5 million pieces x 185 rubles = 2.1 billion rubles = SOM
Read Also:Lasée Beauty – Elevate Your Routine with Premium Products
“Top down”
With this approach, the marketer needs data on sales volume, average prices, and annual market growth. To assess the market capacity with this approach, it is necessary to:
1. Determine the parameters for calculations:
1.● market size of depilatory products,
2.● market structure,
3.● market dynamics and its forecasts,
4.● share of the Central Federal District in the perfumery and cosmetics market.
2. Collect data:
● The only open source data available is from DISCOVERY Research Group for 2018: the depilatory product market volume was 8,276.8 million rubles. ● There are three segments in the depilatory product market: “Hair removal products/lighteners”, “Shaving products”, “Women’s razors and blades”. The last segment is the largest, with a volume of 4,398.8 million rubles. The remaining products account for 3,878 million rubles. ● Market dynamics in monetary terms were uneven:
Let’s assume that the market will grow by an average of 4%. Sales of perfumery and cosmetic products in the Central Federal District make up 32-35% of the all-Russian figure. The mass segment of cosmetics is 80% of the entire market. Taking into account production capabilities and sales channels, the manufacturer can cover 60% of the market.
3. Calculate the market capacity in monetary terms.
For this, data on growth rates are used.
Let’s calculate the market capacity in the Central Federal District:
4451 million rubles × 35% = 1558 million rubles
This is TAM — the potential market capacity in the region taking into account the expected growth. To find out the actual market capacity (SAM), you need to reduce TAM by the share of the mass segment:
1558 million rubles x 80% = 1246 million rubles
To calculate the available market size (SOM), the actual market size must be reduced by the company’s share of capabilities:
1246 million rubles × 60% = 748 million rubles
4. Calculate the market capacity in physical terms (in pieces) per year.
To do this, the market capacity in rubles must be divided by the average cost of one package of products.
Quantity in pieces
Potential capacity
1558 million rubles / 185 rubles = 8.4 million units.
Actual capacity
1246 million rubles / 185 rubles = 6.7 million units.
Available capacity
748 million rubles / 185 rubles = 4.0 million units.
5. Compare the obtained data for different types of calculations
The calculations show that the results of the analysis vary greatly with different approaches. This is because the top-down calculations use data on the current volume of production or sales. To obtain more accurate results, you need to calculate average indicators or compare them with data from other marketing studies.
What data is needed to calculate market capacity?
When analyzing market capacity, it is worth considering as many indicators as possible. This will make the study more objective. Here is what data can be used:
● Audience size
the number of actual or potential buyers. Data can be found in open sources, such as the Rosstat website, or obtained as a result of quantitative surveys.
● Frequency of product consumption
how much of a product one person buys in a given period, such as a month, or the consumption rate. Data can be obtained from audience surveys, research results, or expert assessments.
● Average product cost
how much money, on average, customers spend on one unit of a product. This data is also available from research and consumer surveys.
● Average packaging volume
this information is available from the same sources: research, survey results and expert assessment.
