# 2 Formulas To Estimate Dollar Values of Target and Potential Markets

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Meet Kate. Kate is the CEO of HRT Insurance, a health insurance company located in New England. Her company is looking to expand and together with her advisors they are working to determine which new market will be most profitable. How can she predict the value of two possible markets to come to a conclusion on her expansion strategy?

Meet Sam. Sam is the owner of RoofCo, a roofing company in Colorado. Sam and his team are considering relocating, and are trying to project and maximize business revenue in two different locations. If all else remains the same, what is the value of RoofCo’s current target market? What if they relocate to an area known for tornados, what is the new total value of this potential target market?

Answering these questions can be done using two simple equations, and we’re going to show you how!

Defining The Variables

But before we get into the math part we first want to explore a few key terms that provide important context for this article:

• Target Market – The demographic of buyers or potential buyers of whatever product or service your organization sells or provides. Identifying your target market isn’t optional; you have to know who to aim your advertising, sales and marketing at. Your target market can also be thought of as the sum of your best prospects.
• Problem – What you as an organization are working to solve for (not sell to) your customers. This is also known as the “triggering need”. The problem (or need) that you set out to solve must be one that you know how to solve, and solve well.
• Ideal Customer Experience – The customer experience of your own design that aligns as closely as possible to your daily operational strategies. Your primary focus as a company must be meeting or exceeding this ideal customer experience.  Doing so can have a powerful impact on your organization’s financial performance.

It’s important that you have a deep and thorough understanding of your target market, no matter what your organization is or does. Why? Because that knowledge will influence decision making across all levels. It will impact how your products and services are designed; how you position your unique solution; and the language you use to connect with prospects. And it will be how you design your ideal customer experience (designing an ideal experience implies a deep understanding of who you are designing it for).

Specificity is equally important. Specificity means that you’ve narrowed down a specific niche of your target market that your product or service impacts the most. Knowing your specific audience within your target market is important because not all potential buyers are part of your target market.

Just being a potential customer with money to spend isn’t reason enough to invest time and money on marketing or advertising for this segment of the population; in fact by doing so you could actually end up costing your company money. A non-target customer is less likely to be happy with what they buy, and more likely to have complaints which costs time and money at the customer service and management levels of your operations. We call these “profit leaks.”

Target customers however, are more likely to be happy, repeat customers, which is why we pay special attention to them. The following equations are to assess the size and value of your target market.

Equation1: Find The Value Of Your Target Market

Multiply the number of customers (current and potential) who have this problem by the dollar amount they each currently spend. The result is the size of your target market in dollar value.

Number of customers with the problem we can solve

Multiplied by the \$ they spend to solve this need

= \$ Value of your target market

Use this formula when you are trying to understand how much your existing product can grow within a specific market. Knowing the size of your target market can help you determine the amount of resources to put towards capturing that market.

Equation 2: Find The Value Of Your Potential Market

For newly identified problems, in scenarios where you are educating the market:

Multiply the number of customers with this problem by how much they would spend to solve it. In other words, how much is it worth to them to make the problem go away? The result is the size of your new, potential target market, in dollar value.

Number of customers with the problem we can solve

Multiplied by the \$ it is worth to them to solve this need

= \$ Value of your potential target market

Use this formula when you are trying to understand how much your existing product can grow. Again, the number you come up with can help you design marketing initiatives.

Back To Our Earlier Examples

Remember Kate, she was working to determine which of two target markets would be more profitable for her company. In target market A Kate’s company can sell 10,000 plans at \$6,000 annually to solve the need of financial protection for that target customer.

10,000 (customers with the problem) X

\$6000 (the amount they are willing to spend to solve this need)

\$60,000,000 (the value of her target market)

In target market B Kate’s company can sell 8,500 plans at \$9,000 annually to solve the need.

8,500 (customers with the problem) X

\$9,000 (the amount they are willing to spend to solve this need)

\$76,500,000 (the value of her target market)

Kate’s company will heavily consider market B.

Now what about Sam. His company RoofCo wants to know the actual value of his current market, and potential value of a different market, to determine whether to relocate his roofing business. Let’s say there are 950 homes in Colorado who are right now willing to pay \$8,000 for RoofCo’s solution.

950 (customers with the problem) X

\$8,000 (the amount they are willing to pay to solve this need)

\$7,600,000 (the value of his target market)

But tornado season is predicted to be quite active in the midwest United States. From his research, Sam knows there could be as many as 2,250 homes in that area in future need of a roof, who are willing to spend \$8,000 (more because this market will have a specific and great need for RoofCo’s solution).

2,250 (customers with the problem) X

\$8,500 (the amount they are willing to pay to solve this need)

\$18,000,000 (the value of his potential target market)

Sam will consider relocating his business.

Conclusion

In order to accurately assess your target and potential markets, you must have knowledge and insight on these markets. From there, determining the value of your target market is not a complicated process. With only a few data points you can calculate how value both the value of your actual target market and the value of your potential target market. Armed with these metrics you can make more informed decisions as you evaluate new opportunities for business development and growth.

What other important equations do you use when evaluating your target market? Are there other metrics that should also be considered when looking at size and value of a market? Share with us in the comments.

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Republished with author's permission from original post.

Linda Ireland
Linda Ireland is co-owner and partner of Aveus LLC, a global strategy and operational change firm that helps leaders find money in the business performance chain while improving customer experiences. As author of Domino: How to Use Customer Experience to Tip Everything in Your Business toward Better Financial Performance, Linda built on work done at Aveus and aims to deliver real-life, actionable, how-to help for leaders of any organization.