The German car manufacturer is coming off the back of a challenging 2022 campaign, where it struggled initially with high levels of porpoising on its W13.
However, an intensive in-season effort to get to the bottom of the problems helped deliver a good step forward and the squad was able to pull off a 1-2 finish in the Brazilian Grand Prix.
The winter period has given Mercedes the opportunity to rethink critical areas of its car, and there have been hints of a concept change.
However, Wolff has suggested that the team is pushing on with a similar design for 2023 because it is convinced there remains a lot of unleashed potential in it.
But rather than anticipate Mercedes will be able to start the campaign with dramatically better performance than it ended last year, Wolff is eager to play things down.
Instead, he says Mercedes must remain realistic about the challenge it will take to close down Red Bull, which dominated much of last year.
"I think we have understood how we fell back, where the shortcomings are, and where we have gaps in understanding," explained Wolff.
"We're working hard on putting a car on the ground that has addressed all of that. But we will only see when starting testing whether we have unlocked the potential that we believe has always been in the car.
"We have no doubt, when you're starting behind by half a second, that it's going to be difficult to catch up to such great organisations like Red Bull, or Ferrari.
"Now, having said that, we are super determined in doing just that. But we need to set our expectations at a realistic level."
Mercedes' chances of fighting at the front in 2022 were hampered by its focus for several months being on problem-solving rather than chasing performance gains.
That meant it was left on the back foot for much of the season until a promising upgrade package arrived at the United States Grand Prix.
Wolff hopes that Mercedes can at least mix it with the frontrunners from the start of 2023, and thinks that would then give it the platform it needs to push forwards.
"If we perform in the way we hope, then we'd like to be part of the racing at the very front," he added. "I think that would be a starting point.
"But we don't take that for granted. It could well be that the gaps are like they were at the end of last season.
"I think there is so much potential still that within our car, within the concept, the way we drive the car, etc, that maybe our development slope can be steeper in the months to come."
