When companies enter new markets or expand into existing ones, several factors should be taken into consideration. One of the most important factors is a market’s size and growth rate. While the size can give you a general idea of how much revenue is available in the market, it doesn’t give you other leading indicators of profitability or success.
What is Market Growth Rate?
Market growth rate is the change in a market’s size over a given period, typically expressed as a positive or negative percentage. It quantifies the rise in demand for a product or service within a market. Market growth is directly proportional to consumer demand.
Why is Market Growth Rate Important?
Calculating the market growth rate can help you determine the market potential of a new product or service. For example, is the market you’re entering (or already selling in) growing or declining? What do the last 5-10 years of sales data look like for your industry? Knowing these numbers can help shape your predictions and accurately assess the potential of a new or expanding market. It makes it easier for you to project the future of your business and define clear milestones and goals.
Market growth rate can also give you an idea of how competitive or intense a market is. For example, in a huge market where growth is slow, your competition is probably intense—you’ll need to work harder to capture more market share and drive profits. But in a fast-growing market, there’s often more market share up for grabs, which means the competition isn’t as intense (yet)—so you can invest resources in growing revenue with net-new customers instead of trying to steal market share away from your competition.
By calculating your market growth rate percentage, you can measure yourself against others in your industry. For example, let’s say you’re a small- or medium-sized business selling a new vegan skincare product. The beauty industry is massive—so if you compare yourself against the beauty giants, you may find yourself lagging considerably. But you can compare your growth rate against the growth rates of similar-sized businesses in your market to get a better idea of how you’re faring.
How Do You Calculate Market Growth Rate?
To calculate the market growth rate, you’ll need to calculate the total market size in terms of revenue (including total sales for the entire market with you and all your competitors combined). The sum is your current market size. You’ll need that value for each of the years you’d like to track growth. Once you have it, subtract the market size for year one from the market size for year two. Divide the result by the market size for year one and multiply by 100 to convert to a percentage.
To illustrate this simply, we’ll use ‘Year One’ and ‘Year Two’:
((Year Two Market Size – Year One Market Size) / (Year One Market Size)) x 100 = Market growth rate (%)
Note that calculating the market growth rate for a single year won’t give you a very accurate picture of market growth. We recommend doing a few calculations to compare the average growth rate in your industry over multiple years. Those results will establish a trend (hopefully positive!) that shows you how the market is performing.
Market Share vs. Market Growth: What’s the Difference?
Market share refers to the percent of total sales generated by a company in a specific market. In most cases, companies that have a high market share are much more profitable than their smaller-share competitors. So while market growth measures consumer demand for a product or service category over time, market share can measure consumer demand for a specific product or service within that market.
If you have a high market share in a market with a high growth rate, you’ll also gain traction faster than your competitors as the market expands.
What are the Types of Market Growth?
There are a few basic types of market growth:
- Demand: The market growth rate increases as consumer demand for a product or service rises. Demand is directly proportional to growth—the more demand there is, the more the market grows. Demand can fluctuate based on product pricing, availability, market conditions, and societal trends.
- Supply: If there’s a surplus of products in a market, the price will typically drop. Conversely, prices rise if there’s a lack of availability for a product or service. Supply fluctuations can affect market growth in different ways. If supply drops to a point where the price becomes inaccessible for consumers, the growth might slow down.
- Premium Pricing: High-value products can drive a market’s growth rate by increasing the average selling price. Consider a luxury bottle of perfume: though it may have lower unit sales, the high price tag drives up the average sales price, which increases market growth.
- Performance: Similar to premium pricing, high-performing products come with a higher cost, which drives up the average sales value and increases market growth. A recent example of this would be the introduction of Dyson’s luxury hair tools (the Airwrap and hairdryer)which are exponentially more expensive than the average hair tools on the market.
- Commoditization: As new alternatives are introduced into the market and products become obsolete, they become commodified, meaning consumers are shopping based solely on the price of a product. Once there are no longer significant differences between the products, consumers will focus on the one thing that is different: the cost.
- Inflation: Inflation significantly influences market growth because it leads to an increase in prices. Though revenue may grow by a certain percentage due to inflation, unit sales may not actually be increasing.
- Demographics: Different demographics will have varying levels of demand for certain products or services. Market growth tends to vary based on the population growth of these demographics, and demand can fluctuate as certain populations age out of a target market.
Tap into Your Full Market Potential
Calculating the market growth rate can help you make more accurate predictions about your market potential. Finding and aligning on the right data for these analyses can be more difficult than it seems, especially if you don’t have a clear framework.
Starlight Analytics has a team of seasoned product experts that power winning products across all major industries. We’ll equip you with high-quality, easily digestible insights and actionable takeaways that are practical and considerate of your business strategy. We can even help you uncover product whitespace and new market opportunities by identifying unmet customer needs and emerging conversations.
Together, we’ll review the output and work to prioritize which ideas have the potential to influence your product roadmap. Want to learn more? Click here to share more about your goals and get started.