One of our outstanding mentors, Michael Leventhal, helped out with a presentation on calculating potential market. Michael's background with Nielsen combined with his focus on cannabis provides fascinating insight into market potential and lends a degree of structure desperately needed within the industry.
Some takeaways from the presentation:
- Surveys are critical to determine % of likely purchasers
- B2B plays may need to rely on focus groups instead of surveys
- Be conservative when estimating actual purchases, backing off of survey numbers
Another great set of tips involved the three basic requirements to satisfy before a purchase CAN be made:
Super basic...now can you answer the underlying questions for your company's services/products?
What percentage of the potential market population is aware of your product/service?
What percentage believe they need your product/service?
What percentage could purchase your product/service today?
Multiply those three percentages together and you start to see how small your potential market is right now, and why advertising and distribution play such important roles in business (they are 2/3rds or more of the equation).
How does this play out? Let's say we're selling a new edible in Colorado...approximately 3 million adults plus tourists (a whopping 71 million in 2014 - we'll call that 50 million more adults) for a total of about 53 million potential customers.
53 million * (% aware of new edible) * (% needing/wanting to consume an edible) * (% able to purchase the edible today) = Potential Customer Population
53,000,000 * .05 * .1 * .1 = 26,500
How does that play out? Well, 5% of the 53 million people "know" about our new edible, that's about 2.65 million people - job well done by our advertising department! Of those 2.65 million people about 10% of them are interested in consuming an edible of any sort, that drops our number to 265,000 people. Finally, of the 265,000 people who want to try an edible, perhaps even our edible, only 10% of them have access to make that purchase today, or about 26,500 people.
What's our potential revenue if our price point is $15?
26,500 * $15 = $397,500
Now let's talk competition...