Market potential analysis - What Is it & How to Do it

post written by Dimitris
Market analysis

As an entrepreneur-at-heart, you may often come up with product ideas that seem to be the "next big thing". Projects that solve a very particular challenge in a given industry.

Before pursuing the development of your idea, however, you need to understand if there is demand in the market. Failure to do so could lead to a complete waste of time and resources.

So what is the best way to understand if your project has potential?

Obviously, the first thing that comes to mind is preliminary research. But this can be quite vague. The type of research that is needed at this point should be focused on the existing market conditions, and how these affect your business idea. And the best way to do this is through a market potential analysis.

What is a market potential analysis

What is Market

In short, market potential analysis (definition) is a strategic tool that helps you understand the feasibility of your idea and the level of demand in the market.

The research is done through a series of separate analyses. You can consider each subsection as a different perspective or angle. The results of all different analysis methods are then placed in a report that determines the viability of your project idea.

What is included in a market analysis?

In the following chapters, we will show you exactly how to perform your own market opportunity analysis by explaining each component in depth. Then, we will explain how you can structure the findings in an actionable report.

In the following chapters, we will show you exactly how to perform your own market opportunity analysis by explaining each component in depth. Then, we will explain how you can structure the findings in an actionable report.

  1. Defining the target group
  2. The first thing you need to clarify is the target group. This is the audience you are trying to attract - the potential buyer. When you understand the customer, you understand their problem.

    Why is it important to know your target audience

    • To tailor your marketing strategy and test hypotheses
    • Improve your message and communication efforts.
    • To create buyer personas and establish a tone of voice.
    • So you can segment your audience and improve personalization efforts.
    • To promote your product as the solution to their problem(s).
    • To define an audience that the sales team can work with.

    How to define your target audience

    Organize a brainstorming session. Gather your team around a table and dedicate a short period of time answering some of the main questions surrounding your product:

    • What problem(s) is my product trying to solve?
    • Who most benefits when the problem is solved?
    • Has my target audience the financial capacity and willingness to pay for my product and are the customer acquisition costs in relation to the CLV? (more on this below)
    • How can we position the brand to attract this audience?
    • How specific can we become when it comes to the buyer?

    The more in-depth you go, the more options you will come up with. While a product may have one particular purpose, there are myriads of ways to position it. How you decide to promote a product will depend on the type of people you want to attract.

    Assume that a sunscreen brand wants to develop a new moisturizer with SPF. While analyzing the market, the team discovers that the market is overly saturated.

    In order to stand out, the company needs to focus on a very particular audience. In other words, they need to define a target group that other brands are currently not focused on.

    To tackle this, the company decides to promote the ecological benefits of the product's recycled packaging and it's ethical testing.

  3. Preliminary competitor analysis
  4. When creating a market potential analysis, it is also important to explore the companies that dominate the niche. Your competition already has the insights you need. They have most likely done tons of research. These strategies can help you learn a lot about the potential of a product and its position in the market.

    Why you should analyze your competitors

    • To "steal" information and replicate tactics that are already working for them.
    • Understand how difficult (or costly) it is to compete in a particular market.
    • Build relationships with partners that your competitors already work with.
    • Discover market "gaps" that your product can fill.

    How to do competitor analysis

    There are several ways to understand the importance of competitor analysis. The easiest way to start is by looking at the keywords that your competitors are currently ranking for.

    1. Visit Google and type in the main keyword(s) you want to rank for. You will notice several other companies ranking on the first page (excluding Google Ads and list posts). These are your top competitors.
    2. Preliminar analysis competitors
    3. Copy the URL of your competitor and paste it in a tool that will give you insights on their keyword clusters. An easy tool for this practice is Ahrefs.

      The software tool has a 7-day trial for $7. This should be enough to conduct a full competitor analysis, exploring among others their top-ranking keywords. For reference, here is how the overview looks like:

    4. Preliminar analysis competitors

      The metrics will help you understand how strong your competitors are.

    5. At this point, you will be able to explore different options that can be useful for a market potential analysis. The two most important tabs you should focus on are Organic keywords and Top pages.

    6. Organic keywords - These are all the keywords for which your competitor is ranking organically. You can filter them for search volume and ranking difficulty to discover opportunities for easy ranking.

      Top pages - These are the pages of your competitor that receive the most traffic. It is a great way to understand what your target audience is reading, so you can cover the same topics as well.

    7. Repeat the same process with several competitors in order to:
      • Discover patterns and gaps in the existing content.
      • Know how to differentiate yourself from the competition.
      • See if there is enough demand and potential for the development of your product.
  5. Preliminary keyword research
  6. Now that you have a pool of keywords that your competitors are ranking for, you can further enrich your research with your own keyword research. Keyword research is used to discover content ideas that are currently underserved. It is most often used during the development of topics for your blog. However, it is also used to understand the ranking potential of a specific niche. In other words, you get a better idea of the demand in a particular industry.

    Why you should do keyword research

    • To understand the level of demand and interest in your product.
    • To get insights into the average cost per click for industry-relevant keywords.
    • Find keywords that are easy to rank and use them to your benefit (for later reference).

    How to do keyword research

    In order to perform keyword research, you will need to use tools that help you with the process. These come both in free and paid options:

    • For free tools, consider using Ubersuggest and AnswerThePublic. These tools are great for keyword research but the results are often limited. Here is a short clip on how to use Ubersuggest to discover keywords:
      • If you are ready to go with paid options, you can use tools like SemRush, Ahrefs, or KWFinder. These tools give a better overview, and a lot more keyword options while reducing your research time to the minimum. The following video helps you get started with Semrush, which has a 7-day free trial:

    Overall, when it comes to a market potential analysis, it is best to combine at least a few of the tools above. This is because of two reasons:

    • The search volume and keyword difficulty is never exact with any of the tools
    • Each tool has some unique metrics that can't be found in other options
  7. Lead generation pricing & conversion cost
  8. Now that you have a better understanding of the average ranking difficulty, you will need to get a basic idea of the costs associated with lead generation and customer acquisition.

    This will help you discover the following:

    • How much it costs to acquire a lead (qualified traffic to your website).
    • The approximate price to acquire a paid customer based on industry averages.
    • The ROI you can expect from each paid customer.

    How to calculate cost per customer acquisition

    Most keyword research tools will also show you the average cost per click for any given keyword. Below is an example of KWfinder:

    lead generation pricing conversion cost In short, this is the amount you would need to pay if a visitor clicks on your Google advertisement - the cost of acquiring a qualified lead.

    ROI calculation can be made when comparing the customer lifetime value (found through customer value analysis) with the cost of acquisition:

    1. You will first need to discover the % of leads that turn into paid customers (conversion rate). An exact number cannot be given at this early stage, but an industry average is usually available.
    2. Then we calculate the ROI with the following formula:

      ROI = Traffic Volume * Cost Per Click * Conversion Rate

    For example, 1000 clicks per month * $1.00 (example of average CPC for keywords you are targeting) * 4% (example of average conversion rate) = $40

    The cost to acquire a customer (for the above example) would occur at an approximate cost of $40. As such, in order to make a profit, the lifetime customer value should exceed $40.

  9. Trend analysis
  10. Trend analysis is a basic component of both market research and marketing research. This process is possible with the help of software tools (both paid and unpaid).

    Why you should analyze trends

    • To understand if your product serves is a fad or a timeless need.
    • Helps you adapt to market changes and stay ahead of your competition.
    • Provides evidence to help you make better decisions around your longer-term strategy.

    How to perform trend analysis

    There are many different ways to analyze trends and just like keyword research, these should be cross-checked for a more effective overview.

    1. You can use Google Trends to check how trending a particular keyword is over time. Trend Analysis

      This free tool is very flexible, allowing you to filter, compare, and segment the results depending on your company's needs.

    2. Aside from Google Trends, you can also find information from the keyword research tools that you previously used. Most tools will usually have a dedicated section to show the interest rate over time. This is an interesting addition to your analysis. The trendline below is from KWFinder. Trend Analysis

      The information for most of these tools is derived from Google Trends, so there should not be any surprising findings there. However, when compared with the Monthly Searches over time (tab next to Trends), you might discover some interesting correlations.

      Trend Analysis
  11. SWOT analysis
  12. SWOT analysis is a planning method used to identify strengths, weaknesses, opportunities, and threats related to your project and its competition.

    Why is SWOT analysis important?

    • Points out the unique selling point(s) of your product (strengths)
    • Helps you identify the problems and limitations (weaknesses)
    • Uncovers "golden nuggets" that your business can utilize (opportunities)
    • Informs a business of potential challenges related to the industry, market, or product in the long term (threats).

    How to perform a SWOT analysis

    MindTools has an excellent blog post that explains how you can perform a SWOT analysis step by step. It also offers a downloadable template that you can use as a reference when drawing up your own SWOT analysis.

Putting everything together

You now know the importance of market potential analysis and all its different components. Once you thoroughly research all the points discussed above, you will know if there is enough demand for the product you want to create. To sum everything up, you can write a report that summarizes the findings.

How to structure the final report

  • Introduction - Start with a small introduction and 3-4 bullet points with the main findings of your research. This can also be considered as the abstract.
  • The target group - Briefly analyze the target group and mention any particular segments that are over or under-served.
  • Competitor analysis - Explore the 5-10 most popular competitors and try to point out what type of content they are ranking for. This phase will also reveal several opportunities and threats that you can later use for the SWOT analysis.
  • Keyword research - Analyse (1) keywords of your competitors and (2) keywords that you discover through brainstorming. This will offer insights related to ranking potential and demand.
  • Cost of lead generation - Calculate the cost to acquire a lead through paid advertisements on different platforms. We discussed how to do this based on Google Ads pricing. If relevant, add separate subchapters with Social Media platforms as well.
  • Cost of customer acquisition - Is the cost of customer acquisition worth the potential returns? Here you can add a note with your subjective opinion at the end of the chapter.
  • Trend analysis - Add 2-3 graphs that estimate the public interest of particular keywords over time. Make sure that these keywords have a high search volume (short-tail) and reflect your product as much as possible.
  • Swot analysis - Based on the findings and your personal experience with the product, create a SWOT analysis to illustrate the strengths, weaknesses, opportunities, and threats of the product you want to create.
  • Conclusion - The conclusion should answer two questions:
    • Does this product have potential?
    • Is the market ready for my offer?

Use all your research as a reference point and give follow-up recommendations.

Frequently asked questions

Do you have any more questions? If the following Q&A does not answer it, feel free to contact us so we expand the section even further.

Why is market research important?

Market research is an essential preliminary step that should be taken before you kickstart the development of your project. Among others, it will help you understand

  • The current conditions of the market in the industry you want to operate in.
  • The market profitability potential and the segment that your product can capitalize on.
  • What your competition is doing right and wrong and how you can improve upon it.
  • What steps you need to take to ensure the success of your product in the long term.

Should I also perform a Customer Needs Analysis?

Not necessarily. Analyzing the exact needs of your customers is done at a later stage when building your marketing strategy. The importance of marketing research only becomes prevalent when your (minimum viable) product has been developed.

Are there any essential market research tools?

That depends on the depth and precision you want your report to illustrate. For starters, you can use both free tools and paid options (using a trial) and find what works best for you. All market analysis tools can be found in the chapters above.

What is market validation? Is it different from a market potential analysis?

Market validation is a generic term that refers to the process of exploring a particular product-market fit. On the other side, the analysis part is done to derive to conclusions, insights and actionable steps. In other words, it is the set of methods that you use to explore and hopefully confirm the validity of your concept. The terms are often used to describe the same thing, as the difference is so small. Adding to that, in case you are wondering what is startup validation, the same can be said. It is the process of market validation in the context of a new startup idea.

What types of startups need a business potential analysis?

When exploring the types of startups that need to find explore a potential product-market fit, we look at their stage of growth rather than the industry they work in. Most often, ideation projects and companies very early in their funding rounds will need to perform such actions. Having a detailed (and evidence-backed) report that illustrates the potential of a business idea will increase your odds of funding when meeting potential investors.

What is the difference between market and marketing potential analysis?

Market analysis, as mentioned in the article above, refers to the process that helps you understand market demand and feasibility by exploring different factors, like the interest of your audience in particular keywords.
Marketing potential analysis, on the other hand, refers to the exploration of different marketing techniques that could be implemented and how these would work for your product (or industry). It is mostly done by reviewing the marketing strategies of existing competitors and how these performed over the long term. For example, one could say that particular e-commerce stores perform better with paid advertisements since organic marketing efforts in the industry are heavily saturated. Or there may be industries where paid ads are forbidden, in which case influencer marketing would be a better option.