Ask the Experts | How Do I Estimate Market Potential?

Question: How do I estimate my market potential?

James Leichter; President, Aptora Corporation & Mr. HVAC, LLC: Oh boy, that’s a tough one. Give that to Mike!

OK, so we gotta do some math. If it’s market potential, meaning like, how much potential do we have for revenue or market share — I’m hoping that’s what they mean, cause that’s how I’m taking it — the first thing you need to do is size up your service area.

To make the math easy, let’s say that we have 100,000 homes. And we’re trying to figure out, by the way, residential service replacement potential. So start with how many homes in your service area, let’s say there’s 100,000. You might have a lot more, but I want to make the math easy. And you might Google this, do a little research to figure out what the average annual spend is for HVAC repair. I’ll tell you that it’s not easy, it’s listed under what the government calls an SIC Code 1711, and you can find the stats.

The average home spends around $500 a year on HVAC work. Now not every year do they spend $500, some years they may spend $15,000, right? But the average is about $500 per year. But do the research for yourself, don’t trust me on that; it’s been awhile since I needed to know that.

So we have 100,000 homes spending $500 a year, that’s $50 million right? That’d be $50 million in HVAC spending. So there it is, that’s your market potential: you could have $50 million in residential replacement service sales. But you’ll never have 100% of the market, right? So what if you were to get, oh, a fraction of that?

Let’s say your department does $1 million in residential service and replacement sales. That’s 2% of 50,000. The formula would be your annual sales, divided by market potential, times 100. So in this case, you’re doing $1 million in sales, divide that by $50 million in potential, times 100, equals 2%. Hope I got all that right, that’s 2%. So you currently have 2% market share.

Well, you could have 3% market share, 4% market share. You’ll never have 10% market share. I shouldn’t say “never,” cause that sounds like a bummer, right? That’s me being negative. But most likely you’re not going to have 20% market share, so you have to think of something realistic. I can tell you that 5% market share is fantastic, if you’re at 5% market share.

Also think about how many heating and air conditioning companies are fighting for that market share. So if you had 100 companies fighting for that market share, well that’s a lot better than 300 companies fighting for that market share.

So that’s how you would determine your current market share, and then from there you just have to set a reasonable goal for the future. Like if you’re currently at 2%, you might say ultimately I want to be 5% market share, we’re doing $2.5 million in residential service replacement sales.

Hopefully that’ll be helpful, hopefully I got the questions right.

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