To prove a market, you build a forecast on credible numbers. Nobody expects you to be correct or right about the future, but you do have to be reasonable, logical, and credible. You should cite sources, such as the U.S. census or trade group statistics, or published articles, or known experts, as much as you can.

Potential Market, Not Served Market
Usually in a business plan, particularly when proving a market, you focus on potential market, not served market.That means your forecast is about the whole wide larger market (cut into segments of course) not just the people or companies you already sell to. Market potential is growth. It makes the forecast interesting.

For example, the market for a move theater, restaurant, or bicycle rental is the local population plus tourists or visitors. The market for downloadable software is the world of users of that operating system, who have the target problem.

Growth Rates (CAGR)
To calculate compound average growth rate (CAGR), the standard formula is:(last number/first number)^(1/periods)-1

You can see that formula at work in the illustration, in the formula shown in the edit bar of the spreadsheet, calculating the CAGR from the two numbers. Average growth in the Consumer segment during that period was 2%.

While it’s not strictly necessary, a market forecast is generally a good addition. That means numbers, like shown here, estimating potential market at present and market growth over five years. This illustrates your segmentation as well, and works as support for your segmentation strategy and choice of targets. You can see how segments are handled in this sample.

In the illustration you can see how the spreadsheet works. It is pointing to cell H5, and the formula in the edit bar is the formula in that cell. It identifies the last year in row-column notation as G5, and the first year as C5. The growth rate calculation produces the number showing in H5, 2%.

As you can probably guess, the formulas in the rest of this row take the growth rate assumption in column B and apply it to the other cells, after the initial value in column C. You add 1 to the growth rate and multiply it by the previous year to get the next year’s calculated amount.

You can create a simple market analysis by estimating the number of potential customers for each segment and the growth rate, as shown in this example. Once you have those numbers, it should be a simple step to develop a corresponding chart, such as the classic market pie chart on the previous page, or a bar chart showing growth by segment.

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.