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How to evaluate international market potential?

Every business has a set of customers that make up its share of the available market. Generally, a business can grow by introducing new products and services to the markets it currently has a presence in, or by launching existing products and services in new international markets. In either case, extensive market research and analysis must be done to better identify the available opportunities in potential markets. Many reasons can push a company to grow by expanding to international markets. It allows the company to take advantage of global demand by seeking foreign clients, to achieve economies of scale and to gain in global competitiveness. 

However, when addressing international markets, companies struggle to understand and estimate their export market potential. Understanding international market potential plays an important part in guiding a business’s future growth. When seeking to expand internationally, evaluating market potential is a crucial step to develop an international strategy for a company. This evaluation can even guide a business in selecting and deciding between international markets offering the most opportunities.

What exactly is export market potential?

Export market potential is the valuation of the potential sales revenue from all the available channels in our countries of export or countries evaluated for potential export. It is generally related to the number of clients that are interested or might be interested in a company’s product or service. The total market potential is calculated by multiplying the number of buyers in the market by the quantity purchased by the average buyer, by the price of one unit of the product.

For example, if there are ten million potential buyers of a particular product in the market and the average buyer buys five units each year at a price of one dollar per unit, the total market potential for that product for the year is ten million times five, times one, or fifty million dollars. In other words, market potential is the potential money-making capability of a firm if it capitalizes all advantages and everything goes its way. It is usually measured in sales units, sales volume or the potential revenue. It sounds very simple, but in reality it is not, as many other factors need to be taken into consideration whilst estimating market potential. 

Why is it important to evaluate international market potential?

While international markets can offer exciting opportunities for many businesses, it is crucial to focus on the markets with the highest potential for a successful internationalization strategy. Identifying the right market to enter can be a major determinant of success or failure, especially in the early stages of internationalization. It is very important for a company to know and determine the market potential of the product of service being offered. If the market potential is very low then it can be unproductive to invest time and resources in elaborating and executing an entry strategy for this market. On the other hand, these investments might be worthwhile when entering a market with high potential.

This is especially important for SMEs that often have limited resources and know-how to conduct a proper analysis of international market potential. SMEs are often tempted to take an opportunistic approach and directly target geographically closer and more familiar markets. While there is nothing wrong in seizing opportunities that arise in neighboring or known markets, it is important to understand that these markets might not be the markets offering the highest potential for your company and products. This might mean that further actions to expand internationally can be more fruitful and offer a higher return on investment in countries with a higher market potential.

How helpful can country economic performance be for this evaluation?

When trying to evaluate the market size of your products and services, and the subset of the total population that can be your potential consumers in a given market, looking into this country’s economic performance can be a good starting point. Economic and macro-level indicators can allow you to draw some conclusions on a country’s market potential for your products and services. Looking at indicators such as GDP, GDP per capita, inflation and median income is important to analyze the size of an economy and the opportunities it may offer.

Other indicators such as population, urban / rural distribution, number of companies by sector or by size, unemployment and population density will also be helpful to the makeup of your potential customer base. Analyzing the growth trends related to this data remains of great importance, as it gives a certain visibility on how the market potential is evolving and on future prospects.

How to estimate potential demand and market size?

The economic performance of a country remains insufficient to properly evaluate the market potential for a company’s products or services. The most important factor of doing that is estimating potential demand for your products and services based on data about the market segments that are relevant to you. This means evaluating the market size for similar products and services in the same market segment as yours.

So, for instance if you plan on exporting cosmetics to a new market, all the combined sales of cosmetics brands and products in this market would constitute the market size. This represents the total sales potential of all these companies put together. Other data points to look into are related to the number of potential customers your products could reach. You can look at the population by age group, by income bracket or even by product preference to try to estimate this number. So, calculating the number of potential customers that fit your target profile for your cosmetic products, will give you a clearer idea of potential demand in a given market.

Alternatively, if your business is more focused on the B2B side, you will have to look into industry specific data. For a company that makes car parts and components, it would be important to look at the overall revenue of the automotive sector in a market to understand its potential. It would also be interesting to look into the number of companies present in the auto manufacturing sector, as they would represent the potential clients of this company’s car parts in this market.

The ongoing trend in the industry is important as it can forecast the future of your products in a specific market. By looking into the growth trends of all the data taken into account can help you see how the market potential is evolving in the coming years. A declining market size for your products would mean that future opportunities would decline, and that the market potential would be smaller when you would effectively start exporting to this country.

Estimating potential demand requires research and analysis of data that is specific to the company’s industry and product segments it targets. It is extremely important for the company to have a good understanding of their products, the customers they target and the potential customers that might be interested in their products. This will generally guide their approach in trying to estimate the market size and potential demand in a specific market.

How does market access affect international market potential?

Analyzing the ease of market access can also give a better understanding of market potential. A market that is easier to access and doesn’t have significant barriers of entry will allow you to reach more customers and thus offers a higher market potential. The Logistics performance index by the World Bank can give a general indication of a country’s performance on trade and logistics. You should also look out for the custom duties that are levied on the products you intend to export. These custom duties will affect your bottom line and should be taken into account together with the total estimated market size to understand how they will affect your total potential sales.

Any regulations and legislation related to your industry in this market should also be looked at. Assessing the existing barriers of entry can show you how accessible the market is for your products. The existence of specific barriers and regulations could limit the market potential you could realistically reach.

Another thing to consider is the current export flows of your category of products from your country towards the market you are analyzing. Looking into how much your local competitors export to a specific country, will give you an idea on how easy or how hard it is to access this market. It will also give you an idea on the potential demand for similar products from your country. All of this will complement your estimation of available demand and help you adjust your evaluation of market potential.

Why analyzing the competition can complement your market potential evaluation?

Markets are now global and each market will have many local and international competitors. Identifying and analyzing your competitors and their presence in a market should be taken into account when looking into market potential. The number of direct competitors, their respective market share and the existence of a dominant player will help you grasp the competitive landscape and the competition intensity in this market. This will in turn, put into perspective the available opportunities in a specific market. A country with small to medium market potential, that is saturated with intense competition will offer much less opportunities than anticipated by looking at market potential alone. 

Understanding your competitor’s position and market share is crucial in determining your market potential in each country. For example, if you plan to export to Italy and you are a specialized retailer in the cosmetic industry, it might be useful to evaluate how your competitors perform in that market and their market shares. By looking at the representation below, we can understand that in Italy, Sephora has a leading position on the market, but the market is quite fragmented so we have many players local and international.

market potential cosmetics

What are some other aspects to consider for international market potential analysis?

There are many other factors to consider when evaluating market potential. Cultural factors and differences could affect the ease of market access as well as the potential demand for your products. Differences in language, beliefs, customs and consumption habits are generally all related to a country’s culture, and to some extent can have varying impact on market potential. Take for example a company seeking to export Christmas decorations to a new market. In this case, the market potential would definitely be higher in countries that have Christmas fête  ingrained in their culture, and that place a higher value on this holiday.

An assessment of the various associated risks to an international market can complement the market potential evaluation and offer a clearer vision to the company. There are many data sources that can give a general indication of these various risks. The OECD country risk classification measures the country’s credit risk and is constantly reviewed in collaboration with a group of country risk experts from export credit agencies. The Corruption Perception Index from Transparency International scores and ranks countries based on how corrupt a country’s public sector is perceived to be by experts and business executives. These indicators can give a clearer sense of the challenges that might stand in the way of a company to realize its full potential in a specific market.

The exchange rate risk should also be taken into consideration. Analyzing the exchange rate fluctuations of your target market’s currency in relation to your local currency over the past few years will give you more visibility regarding this kind of risk. These fluctuations would help you estimate the potential losses due to currency exchange, and adjust your market potential evaluation accordingly.

How can this evaluation guide your international expansion?

An evaluation of international market potential goes through an analysis of the total addressable market for your products and services in a given market, by also taking into consideration the impact of the ease of market access, the competition intensity as well as other relevant factors such as culture and country risk. This deeper understanding of market potential will help you set your objectives for this market, as well as develop an appropriate entry strategy.

The evaluation of market potential for various countries of interest could also guide you during an international market selection process. Comparing the market potential of these different countries will allow you to draw conclusions about which markets offer the most opportunities and the highest sales potential for your products and services. This can help you identify which markets you should prioritize in your international expansion to maximize your return on investment.

This market research and data analysis for a proper market potential evaluation requires a lot of time and resources. Gathering the relevant market size data for a specific market segment or industry, and analyzing factors and trends that can impact overall market potential, can be done by looking through various industry reports and reputable databases. While SMEs usually have limited time and resources to dedicate to such tasks, the lack of familiarity with international markets can further complicate this process.

Prime Target can accompany you in your international business project, and assist you in market potential evaluation. Prime Target’s Market Ranking Report can help you evaluate the market potential of 5, 10 or 20 countries simultaneously, and identify new export markets with the highest potential. This comprehensive and personalized Market Ranking Report can minimize risk, saving time and money, as well as identify new business opportunities abroad.

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