A business performs a market analysis to identify its customers along with their various needs and wants. A crucial aspect of a market analysis is finding the market growth rate, which refers to the rise in sales among your customer base over a given period of time. While healthy companies note a growth in sales that is greater than or equal to the growth of the market, floundering companies record sales growth at a rate below the market. By understanding your market’s growth rate and how it relates to your sales growth rate, you can evaluate the success of a given product or service and make important decisions about marketing your business moving forward.
Determining Market Growth Rate
Companies can use the following formula to evaluate their market growth rates:
First, determine what your market size is by researching and calculating how much revenue the market made in monetary terms (e.g. dollars). This includes total sales of the entire market, you and all competitors combined. The resultant sum is your current market size. Next, find an earlier figure to serve as your original market size. Remember to take note of the time interval between your original and current market sizes (e.g. 6 months, 5 years, 2 quarters, etc.), as this will be used later.
For example, your current market size is $3 billion, and a prior figure from last year is at $2 billion. Subtract your earlier figure ($2 billion) from your current figure ($3 billion) to find a difference of $1 billion; this is your change in market. Divide your change in market size by your original market size, and multiply the quotient by 100. This will give you your market growth rate. In our example, the market that was $2 billion one year ago and was $3 billion this year had a growth rate of 50% over the past year.
Finding your sales growth rate is similar. You use the same equation for determining your market growth rate and just swap out “market sizes” for “sales revenue.” And remember to maintain the same time interval you used in the previous equation.
To continue our example: Your company generated $50 million this year and $30 million last year. The change in revenue is $20 million. Divide $20 million by $30 million, and multiply the quotient by 100, and we have a sales growth rate of 66% over the past year.
By comparing the market’s growth rate with a product’s sales growth rate, businesses can evaluate the success or failure of a given product or service. If your sales are growing by 10%, but the market is growing by 20%, you are lagging behind your competition. In our example, your company’s sales rate (66%) is growing faster than the market (50%), which is good news.
While the math for finding your market growth rate seems simple, the process of collecting the necessary data to evaluate it and your competition is far more complex. Tools like Sizeup let businesses analyze how they are doing in comparison to similar companies in their areas.
Additionally, business owners should do their research to predict future developments in their market areas. By assessing growth drivers and evaluating the performance of similar products or services in the marketplace, you can forecast your growth for the coming months and years. Companies can also review economic industry data to evaluate emerging trends and market forces.
It’s important to note that market and company growth rates vary by industry. For example, a good growth rate for a company that sells clothing might be considered low or even failing compared to a company in the technology industry. By analyzing the market and your competitors, you can better determine what growth rate is healthy for your business.
Why Market Growth Rate Is Important
Assessing market growth rate is essential to directing your business and marketing efforts moving forward. Companies experiencing low sales growth relative to their competitors should investigate the potential causes of their performance issues, such as high prices or insufficient advertising efforts, and take steps to correct them moving forward. Additionally, market growth can indicate how sustainable your business is in the long term. While a high growth rate indicates low saturation and high demand, a negative rate could suggest that consumers are losing interest in your product or service.
Market growth rates are also important to financial institutions, which may use this information to decide whether or not to invest in your company.Investors will assess trailing growth rates to determine how successful the company has been in recent years. Using this information, they can predict forward-looking rates for the months and years to come. If forward-looking rates for a business and its market are positive, investors are more likely to acquire and retain shares in the company.
Clearly, market growth rate is an essential factor when evaluating the viability of a new or existing business venture. By assessing your current rate of growth and comparing it to your industry or your competitors, you can make informed decisions regarding business planning and marketing strategy moving forward.