What Is Market Growth Rate & How to Calculate It?
A key way of testing the viability of your business is calculating the market growth rate. Here’s how you do it and why you should!
You can’t tell the future, but you can calculate some solid predictions. One such prediction is the market growth rate. What is the market growth rate and how can it help you?
Read on, you’re in the right place.
Here’s What We’ll Cover:
What Is Market Growth Rate?
Market growth rate is the predicted percentage growth for your industry over a defined period of time.
We can predict that the market growth rate for cleaning products has skyrocketed after the COVID-19 pandemic. We can also predict that the market growth rate for the cigarette industry is slow to non-existent. That customer base is surely shrinking. Major markets and consumer spending change over time.
When you have a handy percentage metric like this at your fingertips, you can make a judgment on whether your business is worth pursuing. For example, I wouldn’t start a tobacco company today. Would you?
A Quick Word on Market Share
Another important aspect that we need to define is “market share”.
It’s all good and well that your industry is growing. That still doesn’t completely validate your business as a long-term player.
For example, the cleaning product industry may be on the rise because of the coronavirus outbreak. Let’s zoom into a specific product - bars of soap. No one wants to share a bar of soap now. Fancy soap dispensers automatically drop liquid soap into your palm. Antibac gel is on every corner. Is your market share with bars of soap products viable just because the overall industry is growing?
Maybe. Maybe not. This is an example of how consumer attitudes can affect your market share. That’s why you need to calculate the market share to build accurate business models.
The equation is:
(Your company sales / Total industry sales) x 100
If you haven’t launched your product or business yet, you would later this slightly:
(Your projected company sales / Total industry sales) x 100
Now let’s go back to market growth.
Why Does Market Growth Matter?
Market growth matters because you want to make sure your service or product has legs. How useful will it be in the future? Will your product or service still be in demand in 5 years’ time? Are there more customers to market to than ever before?
That’s what you’re looking for. You want to invest your time and energy into a business that has longevity.
If you are seeking investment, the market growth rate is doubly important. Investors want to see that you have thought about the trajectory of your industry position. What factors could impact it? Does it make financial sense to build another business in this space?
If you’re calculating the growth rate of your market as an existing established business, it’s still helpful. You’ll know if your business can still grow and thrive. Or is it time to pivot?
Tobacco companies could seek new life in the cannabis and CBD industry for example.
How to Calculate Market Growth Rate
The formula is deceptively simple:
First, you need to define the time period you are measuring. You want to calculate how much your market has grown in a given time. This could be 1 year, 3 years or 5 years. Even 10 years work if you want to see a dramatic change.
Though just as a head’s up, investors would want to see evidence of rapid growth. So the smaller the time period the better.
((Current market size – Original market size at the beginning of the defined time period) / (Original market size)) x 100 = Market growth rate
Most markets have a slow and steady annual growth. Rarely at a constant rate. Some industries are more variable than others. It’s worth doing a few calculations to compare the average growth rate in your industry over the years. You ideally want to see a trendline upwards, even if it’s slight.
The market growth rate for your industry can help you project the future of your business. You can set realistic goals and milestones. You can verify the validity of a new business idea. You can also convince investors that your industry is only on the up and up!
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