Bulletin #3006, Home-Based Business Fact Sheet: Market Potential for Retail Businesses in Maine
Adapted for Maine from Iowa by Jim McConnon, Extension Business and Economics Specialist
Thinking of starting a retail business? Knowing the local market is vital! Your new business could prosper in one community, but fail in another. Analyzing your market is an important step in deciding whether or not to start a new business.
This fact sheet discusses two methods of market analysis. These methods draw upon secondary sources of data (for example census data and sales) and help the potential retailer focus on what size market is needed to support the average retail outlet in Maine. These tools are only part of the many market analysis methods available to the prospective retailer. No single tool or method will guarantee the success of a new business. However, the more information you gather about the market, the better your chances for success.
Estimating Market Threshold
You can estimate the market for your product by analyzing the population base that currently supports a particular retail outlet within a region. Table 1 presents the number of stores and the number of people per store for 25 types of retail outlets in Maine. The number of people per store was calculated for each category by dividing the state population by the number of stores in that category. This provides an average measure of the population base or trade area population needed to support these types of retail stores in Maine.
Note that the number of people per store varies considerably by type of retail outlet. It takes a much larger population base to support a bookstore than a grocery store. On average, a population base of about 2,958 is needed to support a grocery store, while a bookstore requires a population base of 12,142. The population base needed to support a men’s clothing store is about three times that needed to support a women’s clothing store!
A Maine town with a trade area population of 4,000 probably would not be able to support a department store, but it could prove to be a good location for a convenience store or service station if none exists in the town. By taking a look at a given community and the number of retail outlets similar to the type you are considering, you can estimate if there is room for you to start a new business or expand an existing one.
|County Business Patterns
|Number of People
|Food service and drinking places||2,680||476|
|Gasoline service stations||866||1,472|
|Hotels and motels||572||2,229|
|Building material and supplies stores||519||2,456|
|Gift, novelty, and souvenir shops||305||4,180|
|Pharmacies and drug stores||184||6,929|
|Sporting goods stores||173||7,369|
|Specialty food stores||144||8,854|
|Family clothing stores||143||8,916|
|Bed and breakfast inns||141||9,042|
|Women’s clothing stores||139||9,172|
|Used merchandise stores||117||10,897|
|Retail nurseries and garden centers||69||18,477|
|Household appliance stores||67||19,029|
|Computer and software stores||66||19,317|
|Men’s clothing stores||44||28,976|
Source: County Business Patterns and U.S. Census Bureau
1 As of 1999
2 2000 State population (1,274,923) divided by the number of stores
*Most recent data available as of summer 2001.
Estimating Sales Potential
A more comprehensive method of estimating sales potential for your type of business is to calculate the retail sales market potential for a given product or service and multiply this figure by the market share (percent) you think you will capture. To use this method you need to know: 1) the population of your trade area; 2) the per capita expenditure for the type of store you are considering; 3) the per capita income of your trade area relative to the state average; and 4) an estimate of the market share you expect to capture. This information is available through sources such as libraries, state and federal agencies, the Internet and universities.
Once you have this information, you can calculate an estimate of sales potential for the market and type of business you are considering. Use the formula detailed in Figure 1.
Estimating Market Sales Potential MSP = POP x PCE x (TPI/MPI)
MSP = Market Sales Potential
POP = Trade Area Population
PCE = State Per Capita Expenditure for Type of Store
TPI = County Per Capita Income
MPI = State Per Capita Income
For example, consider a person interested in starting a hardware store in a Maine community that already has one hardware store and a trade area of 6,000 people. Assume that the per capita expenditure in hardware stores in Maine is approximately $100, and the county in which this community resides has a per capita income of 90 percent of the state average (county per capita income [TPI] / state per capita income [MPI] = .90). Using this formula, the annual market sales potential for hardware stores in this community would be:
6,000 x $100 x .90 = $540,000
If the prospective retailer expects to capture 35 percent of the market sales potential, then expected hardware sales would be:
.35 x $540,000 = $189,000
The retailer must then determine if $189,000 constitutes enough volume to support a viable hardware business.
Keep in mind that the method of estimating market potential outlined above produces a ballpark figure based on averages. It should be used only as a rough estimate of business volume. Sometimes, there are mitigating circumstances — such as proximity to large population centers or enclosed shopping malls — that will cause market sales potential to deviate substantially from actual market conditions.
Analyzing the market potential for your goods or services is an important first step in deciding whether to start a new business or expand an existing one. The two methods discussed in this fact sheet provide examples of ways to estimate the market size based on averages. While there is no such thing as a “sure thing,” a comprehensive analysis of the market can improve the management of risk in locating a retail business in Maine.
The Home-Based Business Fact Sheet Series
This is one of a series of publications designed for the person entering or considering a new business operation. See the University of Maine Cooperative Extension Online Publications Catalog for the complete Home-Based Business fact sheet series.
Information in this publication is provided purely for educational purposes. No responsibility is assumed for any problems associated with the use of products or services mentioned. No endorsement of products or companies is intended, nor is criticism of unnamed products or companies implied.
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