GPI 149 – How big is your potential market? Find out. Analyze it one customer at a time!

If you do not know how large your market is, you need to know.  If you have 60% of the market, you are unlikely to grow much and have a lot to lose.  You are less likely to spend on new capital and improvements to retain a 60% share.  If you have .5% of the market, you have the whole world in front of you.  You can justify spending money on new equipment, research and development and pursuing new channels of distribution.  Your current market size helps to dictate where you can go and where you cannot.  For most businesses, your potential market is far bigger than you most likely imagine.

Most businesses are not selling to every potential buyer out there.  Many of your customers are not giving you 100% of their business.  For a business to grow, you must start with the information that you know.  Without any market knowledge except your own sales history and good record-keeping by your sales representatives from their sales calls, you can start the process of market estimation.  Try these steps to get started.

Steps to define your market size, one customer at a time:

1. Add IT Fields to help define market share and potential: Ask your IT programmer to install a few new fields into your customer database.  The first will be populated by an unknown field that you find is unique to your industry such as number of trucks, number of stores, number of buyers, number of regional offices, etc.  This field will be specific to your industry or market and will help serve to estimate all of those customers you are currently not serving.  Leave it blank for now.

The second field you will add will be the estimate of your current percentage of the customer’s total purchases of the product or service you provide.  The field percentage is the current percentage of a firm’s total purchases you are getting.  Ask the buyer.  Some purchasing agents will answer and some will not.  Where you are currently getting sales with a firm, but cannot get a firm answer, assume you are getting 50% of the total business until you discover otherwise.

The third field in your database will be the grand total dollar estimate of the customer’s total market purchases from outside vendors.  For potential customers from whom you have no business yet, the second field will be 0% and the third will be your best annual dollar guess (pick a dollar amount and use it until your market intelligence supports a different estimate up or down).  In the future, you will be making estimates from information you gather that will help to support your assertions in number two and number three.

2. Your percentage of the buyer’s purchases: The second field is the percentage representing your share of the buyer’s purchases.  You most likely will never have more than 50-75% of any buyer’s purchases if the buyer is sharp and he knows he must protect himself in the event one supplier drops out or tries to hold his orders up in exchange for price increases.  Be safe and assume you will normally not receive more than 50% of any one customer’s orders.  You want to lowball this guess.  When the buyer says he has three vendors, enter 33%.  If he says he splits the market between you and another unknown, enter 50%.  If he says you have it all, enter 75% to be safe because nearly all buyers must protect themselves.  For new customers that you have no firm orders from yet, the percentage entered into this field will be 0% until you get an order.
3. Find the highest sales levels for all your customers: Have the IT guy scan the entire sales database for all the years of sales history for each customer.  Extract the highest historic sales dollar amount for every customer regardless of the year that it occurred.  Pick this biggest recorded entry and use it to represent 50% of that customer’s market potential for the next year.  If you are currently doing $100,000 this year with that customer but did $375,000 three years ago, use $750,000 for that customer’s total market value ($375,000 / 50% = $750,000).  Until you know the customer’s potential purchases have dropped, you must assume they have sought out other suppliers and you are getting less, until you are told otherwise.  As you well know, vendors do not call you up and tell you they are shopping elsewhere; finding that out is up to your sales representative if he is sharp, awake and can get the information out of the buyer.
4. Use a ratio, key industry indicator to guess the customer’s size – Field 1: Try to determine how large the customer’s potential purchases are even after he declines a comment.  Ask him but let up if he feels uneasy in disclosing this.  He may be instructed by a paranoid supervisor not to disclose total purchases information.  Ask him if he cannot tell you the total dollars, whether he can tell you what percentage he is giving you today.  If he remains noncommittal, use other statistics to derive a number.

Ratio methods to use depending upon your industry: 

• Count Locations: Count the number of stores the company runs that buy the products you sell and use an assumed average purchase dollar amount per store.
• Use Number of Employees: Use the number of employees the company has; there might be a ratio between headcount and potential purchases.
• Count Service Vehicles: Count the number of service trucks that are employed by your customer and compare to other existing customers.
• Percentage of Purchases: Ask what portion of the customers’ business is affected by your products or services and use other customers’ ratios to extrapolate potential purchases.
• Use Truckload Extrapolation: If he will not give a dollar amount, ask how many times per month or quarter that he might order a truckload (assuming you know the average value of a truckload).
• Compare to Competitors: Watch for sales data in the news media and compare this potential customer’s sales revenue to one of your existing customers already well defined and researched in your database.

5. Gather all sales trip data and update database fields: Use all of the information gathered from your sales representatives’ sales calls after they ask customers how much of your product or service they are currently buying outside of your company.  Purchasing agents do not normally lie about these facts so their estimates will be close enough for your database for now.
6. Create market value for each customer, sales or not: Enter your best estimate for the total market value into each customer’s record.  Enter the percentage of their business you reportedly have, plus the annual estimate of their total purchases.  If the buyer is giving you $50,000 per year and he says you have about 25%, believe him and use $200,000 as an annual amount.  Ask him at the same time what other companies he uses; ask him who your competitors are for his business.  If the buyer tells you he has given you all of his business at $100,000 but his firm is large and the number seems out of sync with his company’s size, enter his total purchases as $200,000 and assume you have only 50%.  It is highly unlikely you have 100% of a customer’s business and thus safer, to assume you have no more than one half.  As your sales grow and disprove each record’s assumptions, update the records.
7. Update individual market estimates as sales rise above 50% maximum levels: When your sales for a customer surpass the 50% level of the estimate you made earlier, have the representative ask how big their current market is.  You will get better responses if you talk about your preparation to review cost savings, changes in processes and potential cost savings for the customer if your firm is awarded more and more of their purchases.  Remind them larger purchases may allow price cuts for the volume increase if they can present larger orders to your firm to fill out more of future production time.  You want to know how large the potential is for a current customer because getting more sales from a current customer is far more lucrative than starting over with a new sales lead.
8. Enter all potential customers regardless of lack of sales order history: When your sales representatives run across more potential customers, enter those customers into your database with their market estimates and have those customers with no sales orders appear on those sales representatives’ sales order reports with buyers’ names and telephone numbers.  They need to show up on the sales order report repeatedly in order to remind everyone of the potential of this customer.  Who are you not selling to?  If you do not write it down, it will fade from memory.
9. Review monthly results and assign someone to gather and update records: Review the monthly results of each customer and adjust the market percentages those buyers claim they have given your firm, which will create a new higher market estimate for this customer.  Assign a person to do this every day.  This is your market so do not ignore it.  Do this on every customer after sales calls.  Instruct your sales personnel to politely ask about the customer’s total purchases or what their current purchase percentage represents?  (i.e.  Are they currently buying 20% from you?  30% from you?  50 % from you?).

Review each month’s purchases and annualize the number (i.e.  3 months’ sales data/ 3 x 12 = annualized sales).  Each time you do this, compare this to the market estimate and where the actual is exceeding the market estimate (over 50% of annual purchases), and adjust the potential market value upwards so that the actual annualized purchases do not exceed 50% of the estimated market dollar size.

10. Publish This Estimated Market Size Report Monthly for Criticism/Review: Publish an Estimated Market Report ($000s) or ($Ms) each month showing the actual YTD sales from each customer and the potential sales that are not being received.  Sort this listing by the largest dollar amounts of the current customers first.  Sales managers can accompany their representatives on some of these calls to see what can be done to obtain more business and if the potential market is really there.

Ask the buyer what their issues are with your company and change representatives if necessary.  Ask what problems the buyer has had with deliveries or the service you provide.  Get the feedback necessary to increase this customer’s purchasing level.  Even if you do not, you will learn more about what is hurting your firm in the marketplace and that is worth far more than anything else given that it probably transcends other companies also.  Obtaining more business from current customers is far easier than getting that first order from an unknown customer.