Without Market Research You Will Miss Valuable Opportunities
While it's tempting to rush to market as your transform your great idea into a reality, a lack of reliable market research can doom your dream. Know your market before you go to market.
The term "information age" defines our world today. All businesses require accurate and timely information to be successful. Whether your company is large or small, financing, equipment, materials, talent, and experience alone are not enough to succeed without a constant flow of the right business information.
Many large companies make market research into a very sophisticated and lengthy process so they can find out everything possible about their customers. Philip Kotler, author and economist, writes in Marketing Management,
Coke knows that we put 3.2 ice cubes in a glass, see 69 of its commercials every year, and prefer cans to pop out of vending machines at a temperature of 35 degrees . . . We each spend $20 per year on flowers; Arkansas has the lowest consumption of peanut butter in the United States; 51 percent of all males put their left pants leg on first, whereas 65 percent of women start with the right leg; and . . .Proctor and Gamble once conducted a study to find out whether most of us fold or crumple our toilet paper. . .
While you probably can't afford a separate marketing research department to gather and monitor all the information that could possibly help you, all successful business owners must know their markets, competitors, customer wants and needs, and "what it takes to be competitive." It is not enough to know the answers to what, where, when, and how questions about our businesses. We also need to know why people buy our products and services. You should expect to budget at least a minimal amount of time and money for research, especially if you are starting a new business or branching out into a new direction.
Determine Your Market Research Needs and Goals
The first step in conducting market research is to decide what you really need to find out. The kind of information you are seeking should determine the type of research you will do (although budgetary constraints will play a part in your decision).
Do you need to obtain a general feel for how key target buyers think about your product category and its various types of items, brands, and buying occasions? If so, interviewing groups of target buyers in focus groups may be the way to go, even though this type of research indicates only directional trends and may not be statistically reliable. Or is the confirmation of general trends in your industry sufficient? In that case, reading information from outside information services, industry trade associations, and industry experts may be all that you need to do.
You may wish to conduct blind tests of different formulas before finalizing recipes for a new product. In that case, you can do "laboratory" tests, where brands, packages, and names of products are not revealed to the test subjects, and achieve statistically reliable results at the 90 percent to 95 percent confidence level of predictability. Or perhaps you have completed extensive product development and testing and are now ready for a field test of your prototype products.
Market Research Takes a Variety of Forms
Generally, market research breaks down into the following categories:
- Primary research. Research involving customized data-gathering about the specific usage patterns, product feature likes and dislikes, etc., of target buyers or current users of your products. This is research done specifically for you or by you.
- Secondary research. With secondary research, someone else has gathered data and complied it into non-customized reports. Most of us are familiar with secondary research from doing library research with books and periodicals. While extremely valuable for general market trends, it does not provide you with information about how your specific customers view your specific goods or services.
These two main types of research can be further broken down into sub-categories, as follows:
As you've likely already surmised, some market research options may not be affordable or appropriate for your company. You may have to be more creative and proactive in:
- deciding to do a limited amount of necessary research and setting affordable budgets
- working with market research specialists or outside experts to define research problems and the design of the research
- accepting the possibility of a greater number of errors or a "lower confidence level" in the mathematical predictability of research results due to:
- small budgets
- small sample sizes
- samples chosen in a manner that's not completely random
- conducting and analyzing the necessary market research yourself or with company personnel
Secondary Market Research Can Provide Insights Inexpensively
Secondary research is something every student has completed at one time
or another, usually by doing library research with books and periodicals
for a school report. This is usually the cheapest and easiest type of
research for small businesses to conduct. However, it may be less useful
than primary research because the information you obtain was not
developed with your particular problem or situation in mind.
Nevertheless, for some types of information, secondary market
research is the only kind available. Examples of information best
gleaned from secondary research are questions about your competitor's
market share or the absolute numbers of potential customers for your
product or services.
Secondary research can be divided into two categories:
- External research. External research involves looking at
data gathered by industry experts, trade associations, or companies that
specialize in gathering and compiling data about various industries.
This is exactly the same type of information that you would use to
determine your customer demographics.
- Internal research. Internal research is data gathered by your
company for purposes other than market research, but which you can use
to gauge what the market will do in the future. For example, a sales
reports broken down by product line can point to a growth area, even
though it was originally generated for sales rep commission payments.
External Secondary Market Research Provides Broad Information
All businesses, large or small, need to know key information about
their marketing environment, competitors, and target buyer/users.
Smaller businesses may not be able to afford to purchase Nielsen data
for their industries at a cost of thousands of dollars per month.
However, total market size, major competitors by category, and target
buyer/user profile information is often available free from industry
publications and trade associations.
The most commonly utilized external information, with some sample websites, includes:
- trade and industry associations and their publications and databases;
- government databases
- companies and consulting firms that track the effectiveness of
marketing and advertising, as well as national and regional trends.
(ClickZ also offers free calculators for Return on Investment [ROI],
Cost Per Acquisition [CPA] and Costs Per 1,000 Impressions [CPM] for your
- Pew Research Center
Internal company data from competitors may be available by
interviewing competitor company executives, attending industry trade
shows, and asking the right questions from industry "experts." They may
be unaffordable as consultants but willing to direct you to free
databases that you would not ordinarily know of or have access to. And
don't overlook your competitor's suppliers. They can be excellent
sources of information to aid your research.
In addition, consider these other external secondary research sources:
- Online searches, using Google, Bing or other major search engines
- Local civic organizations and clubs like the Chamber of Commerce, Lions Club, and Rotary Club.
- Colleges and universities that might have departments/experts related to your field.
- State and local government agencies.
- Industry-specific advertising, promotion, and public relations agencies.
Internal Information Can Be Leveraged for Market Research
Information generated by your own company can often be a source of
market research. Here we're talking about information that was gathered
for purposes other than marketing. For example, it may have been
gathered for financial or management purposes. Some of the most common
sources of information are:
- daily, weekly, monthly, and annual sales reports, broken down by geographical area, by product line, or even by product
- accounting information (e.g., spending and profitability)
- competitive information gathered by the sales force
If you're in retailing or wholesaling, you have a wealth of
information at your disposal if you keep detailed information about your
sales, by product. You may be able to determine not only the types of
products that sell best at various times of the year, but even the
colors and sizes that your customers prefer. There are a number of
inventory tracking software products on the market that can help you
keep track of all this information, not only for financial and tax
purposes, but for marketing purposes as well.
Primary Market Research Answers Your Specific Questions
Primary research involves the design and implementation of original
research during which data is collected from the source to answer your
specific questions. This is the major advantage of primary research—you
get information on the specific question or problem you need answered,
not information that merely applies to your industry or type of business
Primary research is generally divided into two categories:
"experimental" research and "non-experimental" research. As a practical
matter, most small companies bypass expensive experimental research and
utilize the real market environment to conduct field studies. However,
for the sake of completeness, we will provide an overview of
Experimental Research Involves Manipulating Variables
During experimental research, the researcher controls and manipulates
elements of the research environment to measure the impact of each
variable. For example, test subjects (who are consumers meeting certain
criteria, such as frequent users of the particular product or service in
question) are shown several television commercials, and after each one
they are asked questions designed to measure the likelihood that they'll
purchase the product advertised.
Experimental research is often used by large consumer goods companies to test:
- the effectiveness of new advertising, or competitors' advertising;
- the effect of various prices on sales of a product;
- consumer acceptance of new products in trial and repeat-purchase levels; and
- the effect of different package designs on sales.
There are two major types of experimental research: laboratory
studies and field studies. In laboratory studies virtually all variables
are controlled except the one being tested. These are generally done on
the premises of the research company. In a field study, the testing is
done in the "real world," often by test marketing the product in a few
locations to see whether consumers will buy it.
Laboratory Studies Are Accurate, But Cost Prohibitive
Laboratory studies are a type of primary marketing research that are
often used by larger consumer products companies. Although these tests
have a high degree of reliability and correlation with actual market
performance when the test product, pricing, and advertising are similar
to those actually used in the real market, they are cost prohibitive for
nearly all smaller companies. A well-conducted laboratory study can
easily run well over $250,000.
In a typical laboratory study, potential test respondents are
approached and prescreened for type of products used and brand
preference. Then they are exposed to some advertising that's being
tested and are given a chance to purchase the brand among a competitive
array of other products. Finally, the consumers are given some of the
product to take home and use. The researcher follows up with the test
respondents to see whether they used the product, how they liked it, and
whether they would or did purchase it again. Laboratory tests are
generally based upon a minimum of 100 to 300 test-respondents per
location, with the tests completed in a few days at a mall or other
location where target respondents tend to cluster.
Small companies can conduct small-base simulated testing with local
research services or do their own research by showing target buyers
advertising, placing prototype products in homes, and following up with
carefully constructed questionnaires. However, even 100 to 300 test
respondents may still not be a statistically reliable indication of real
world conditions and responses. Smaller companies and local research
services are not likely to have a broad database of test response
histories or access to sophisticated mathematical computer modeling
software. Thus, field studies are often the method of choice for small
businesses who want to test a new business idea.
Field studies Can Be Reliable and Cost Effective
Field studies are a type of experimental, primary market research that
is more accessible to small businesses. They are generally real-world
tests in a controlled group of stores or in a single city. For large and
small companies, the best test of a product may often be actual market
conditions. And for many small companies, a real world test is the only experimental research available — anything else is just too expensive.
Research experts often decry the non-representativeness of the test
sites as compared to nationwide market research, and they dislike the
lack of control over environmental influences. Another complaint that
professional market researchers make is the difficulty of accurately
monitoring test results and then estimating larger market acceptance
upon national roll out, where environment, consumers, sales forces,
competitors, and trade makeup may vary significantly in each regional
area. However, your small business may have no intention of ever rolling
out nationally, so a local field test may be all that you'll ever need.
While there are considerable opportunities for bias in local or
regional market sites, consumer behavior and habits, and local
competitive products, a single retail store or small city test market
can provide significant real world feedback. It is not unusual for
thrifty entrepreneurs to design, test, package, produce initial
inventories, and test-market a new consumer retail product at a cost of
$10,000 or less.
On the other hand, larger national and multi-national companies often
spend hundreds of thousands of dollars in market research prior to
launching a test market for a single product. A large company may spend
over $1 million in a single test market for the first six months. While
you may not have the desire or the resources to do such extensive
testing, the fact that large companies are willing to invest so much
money in this type of research should convince you that a small field
test of your business idea is worth the effort, before you commit all
your funds to the project.
There are two major field testing options to consider:
- controlled store testing—you make your product available in a single store or limited group of stores, and
- city or regional test markets—you make your product available in several stores within a city or a region.
Place Products in One Store for Controlled Store Testing
Many small businesses cannot afford to hire outside consultants and
researchers to provide an extensive product development program.
However, even a one-person firm can conduct its own "in-house"
controlled testing, which involves placing its products in selected
stores. Controlled store test-marketing can reliably simulate
real-market conditions and buyers. The information uncovered can reduce
risks and save time.
Many entrepreneurs have successfully designed and conducted their own
controlled test-marketing by finding a receptive store owner and
placing their products in a single store. You can then refine your
products before you expand sales beyond this home-grown test vehicle.
Both products and services can be tested in this simple, low-cost
A single-person car-detailing company
conducted a test of the business with a local car repair shop. This
entrepreneur spent weekends at the repair shop offering customers
on-the-premise cleaning and home pickup of their cars for cleaning,
washing, waxing, and other car-detailing services. He refined his
"bundle" of services and prices prior to conducting his business
full-time and eventually offered his services as a sub-contractor to
many other auto repair shops in the city.
For business owners contemplating opening a single new store,
providing demonstrations of the new product prototype to potential
target consumers/buyers can provide a wealth of qualitative data at low
financial risk. This informal research can point you in the right
direction for refinement of product features/benefits prior to
committing scarce dollars for expensive molds, production equipment, or
plant and office.
City, Regional Test Markets Provide Broader Feedback
City and regional test markets differ from controlled store test
markets only in the number of stores and size of the geographical area
involved. If you have the finances and the time to devote a
disproportionate amount of sales and marketing attention to the product
test sites, this may be an excellent way to determine whether your
product has market appeal.
Non-experimental research is research done in the normal course of
business, where the environment cannot be as closely controlled as in
experimental research. Also the many variables of the "business" can't
be as easily isolated. This research centers on measuring the entirety
of a project rather than its separate parts.
Non-experimental research is divided into two categories:
- qualitative research, which seeks to obtain many subjective reactions from a limited number of test subjects and
- quantitative research, which seeks to obtain the reactions of many test subjects to a limited number of questions.
Non-experimental research is often used by companies to test:
- buyer responses to new products and product improvements (qualitative)
- buyer evaluation of advertising, packaging, and brand positioning (qualitative)
- effect of a 10 percent price increase on buyer purchase intent (quantitative)
- testing of a new formula against a similar competitive formula (quantitative)
Qualitative Research Focuses on Individuals, Not Numbers
Qualitative research is original company research ("primary") on a
subject in the normal course of company business ("non-experimental").
It is primarily concerned with getting a subjective "feel" for the
research topic, not a numerical, statistically predictable
measure. More concretely, you can think of qualitative research as
in-depth subjective interviewing or conversing with target buyers or
potential users of your product or service.
Qualitative research results might not accurately represent the entire market.
Asking friends and neighbors about how they
"feel" about political candidates and their election platforms is
technically qualitative research. However, a good researcher would make
sure they all qualify as registered voters who do cast their ballots
regularly in order to provide a comfort level for the results of these
conversations about political candidates in a given election. However,
if you conclude that 100 percent of your friends and neighbors will vote
for a particular party, this information may not be reliable in
predicting election trends. The information is biased by your friendship
with the respondents, their demographic and geographic location, and
The value of qualitative research depends upon these factors:
- the subject matter,
- the background of research respondents, and
- the skill of the researcher.
The problem with qualitative research is that your confidence level,
that the results are indicative of the general population or key target
group trends, will be somewhat low. In general, qualitative data
analysis is subject to large statistical errors in accurately predicting
the behavior of the total market of users. This can be a particular
problem in a focus group—especially if you are not using a professional
market research company who will have a moderator trained to handle
difficult people and to probe for accurate information. For example, if
everyone in a focus group likes your product, that may be a ringing
endorsement to proceed. However, maybe only one "loudmouth" in the focus
group liked it, and everyone else was afraid to voice a contrary
opinion. Because of this statistically low level of predictability, you
should be looking for broad general indicators or trends to guide the
Focus groups and in-depth one-on-one interviews are common qualitative methods.
Focus Groups, Individual Interviews Are Key to Qualitative Research
Focus groups can be thought of as "group interviews," where a manageable
number of target buyers are brought together, presented with an idea or
a prototype product, and asked to discuss their opinions with a
moderator and with each other.
Focus group participants generally expect to
be paid for their time. Rates might range from $30 to $100 or more per
participant for a two-hour session, though you might be able to get away
with providing a free meal instead. Generally groups that are
discussing business products or services are paid more than groups
discussing consumer products.
You can hire a market research company to locate the focus group
members according to criteria you specify, and to conduct the session
using a professional moderator, while you watch from behind a one-way
mirror. Or, you can do it the economical way by conducting the sessions
yourself, using target buyers you've located via the phone book.
Regardless of the method you choose, you must give careful thought to
exactly what you want to learn.
Even better, have a prototype for people to examine and try. Assuming
you have already researched secondary databases and found that the size
of the industry available to you is large enough to sustain your
company with a modest market share, conduct interviews with a short
One-On-One Interviews Can Provide Detailed Insights
Rather than conducting group interviews via a focus group, you can
opt to conduct your in-depth individual interviews with potential target
buyers or with people who already purchase a competitive product.
To get an accurate handle on the what the market's reaction will be,
at least 25 qualified people should be interviewed for each significant
product difference or formula. This will provide the basis for
directional evaluation and changes in the prototype, or product
For smaller companies, selecting interviewees from local surroundings
(e.g., local neighborhood for a single retail store) may be the most
practical alternative. For companies doing business in a larger region
or nationally, attempts should be made to obtain as representative a
sample of interviewees as possible throughout the company's marketing
The questionnaire for qualitative research should include:
- demographic information (what is their age, sex, occupation, home locale, income range, etc.)
- confirmation that they use the product or service you're testing
- which brands are used or purchased
- how often brands are purchased
- why they like different brands
- what is disliked about different brands
- discussion of different product attributes
- discussion of the importance of various product attributes
- evaluation of product prototype
Ideally, your test results should be confirmed by quantitative research or a real-market field test.
Quantitative Research Seeks Information from Many Respondents
Quantitative research is a type of non-experimental market research that
provides numerical measurement and reliable statistical predictability
of the results to the total target population. Like qualitative
research, this is original company research ("primary") on a subject in
the normal course of company business ("non-experimental").
Quantitative research is distinguished from qualitative research
primarily by the large numbers of people who are questioned ("sampled
respondents") and the type of questions asked. Generally, sample sizes
of 100 are adequate for simple "yes/no" questions to get results that
are 95 percent reliable as being accurate for the entire market of
buyers. To increase the accuracy to 97 percent to 99 percent, the sample
sizes would have to increase to 400 to 2,000 or more, depending upon
the subject matter and complexity of questioning.
For example, a company might design a prototype product that it
evaluates using qualitative research through focus groups made up from a
target consumer group. Once the features and benefits of the prototype
have been refined to consumers' satisfaction, and communication of the
product's brand positioning in the marketplace has been discussed and
modified, quantitative testing may be done.
At this point, larger companies continue to refine the prototypes and
may conduct a series of blind tests, in-home usage studies, and even
market forecast simulations costing up to $100,000. For smaller
companies, it may be less expensive, faster, and just as accurate to do a
small field-study test in the real market, despite the risks that the
results of the test may not translate to other markets.
To do good quantitative research, you need the following three elements:
- a well-designed questionnaire
- a randomly selected sample
- a sufficiently large sample
Even for small companies, the best recommendation for choosing the
optimum sample size is to consult a professional market researcher or a
nearby school with a statistics department for help in designing,
constructing questionnaires, conducting the research, and analyzing
Well-Designed Questionnaires Are the Linchpin of Quantitative Research
The design of a good quantitative questionnaire depends upon careful consideration of:
- Which decisions are going to be based upon the test results?
- What key information do you need to make these decisions?
- What information was gathered in qualitative research that would be useful?
- How should test respondents be screened for demographic and lifestyle backgrounds?
- How many respondents are necessary for statistical reliability for different questions?
- How will you tabulate and analyze questionnaire results?
Questions may be posed in writing, by fax, or over the phone, but
generally phone interviews have a better response rate. If you use the
phone, you will want the telemarketer to use a script, to be sure that
each respondent is answering the same questions.
Quantitative questionnaires are similar to qualitative questionnaires
but usually gather more information that can be numerically tabulated
with significant statistical predictability. Questions should be based
upon "common sense" and good communication practices. All questions
should be directly related to providing useful information for
decision-making. For example, a questionnaire could include:
- demographic information (age, sex, occupation, home locale, income range, etc.)
- confirmation that the respondent uses the product or service you're testing
- which brands are used or purchased
- how often brands are purchased
- why the respondent likes different brands
- what is disliked about brands
- importance of different brand images
- ranking of brands by preference
- whether price makes a difference to the frequency of purchasing different brands
- evaluation of different product attributes
- ranking of product attribute importance for buyers
- evaluation of brand positionings and advertising
- purchase intent on a five-point scale (definitely, maybe, indifferent, maybe not, definitely not)
- brands that would be replaced by the new product prototype
Construct questions that allow test respondents to easily understand
and answer them. Questions should be ones that your targeted test
respondents will most likely know the answers to and would be willing to
provide information on. Avoid:
- vague questions;
- non-useful background questions;
- trick questions;
- questions that ask for two pieces of information in a single question; and
- questions outside the expected knowledge and experience base of respondents.
Small companies often provide simple
questionnaires to customers when they come into the store or purchase
products and services. They may use the questionnaires to obtain a
qualitative "pulse," or check, mainly to verify that nothing is going
terribly wrong in their day-to-day operations. Or, they may use the
questionnaires to measure the effectiveness of local advertising media
in generating store traffic. Customer database-building is another
Over time, you may obtain results that are
almost as good as quantitative test results, particularly if you ask
simple "yes/no" questions (on customer satisfaction, for example).
Validity of Quantitative Research Hinges on Sample Selection
When conducting quantitative market research, there are two ways to select test respondents:
- probability samples (randomly selected samples)
- non-probability samples
With probability sampling, each individual in the target population has an equal chance
of being selected for testing. This means that test results have a
better chance of being representative of the entire target population.
In a non-probability sample, the selection of the respondents is not
random. For example, if you went door to door on a Tuesday morning until
you got 50 people to answer your questionnaire you would be using
non-probability sampling. Rather than including information from the
entire target population for your product, your responses would be
skewed in favor of those who would be home on a Tuesday morning (most
likely stay-at-home parents or a retirees.)
Many small companies utilize only non-probability sampling methods in
their research. This may be due to budget constraints or historical
But the difference between probability and non-probability
methods can be significant. While only probability sampling provides a
true representation of the total target population, accurate
predictability, and distribution levels, non-probability sampling is not
necessarily bad when doing research and does not automatically render
your results invalid. This is especially true if you have taken the time
to consider what market segments are likely to be your best customers.
In the example given above, if the most likely users of your product
were young parents, then your results might be very relevant.
Aim for the Largest Feasible Number of Respondents
If you're doing quantitative market research, in most cases, the
sample size for the number of respondents you'll test is determined by
your available budget and by the confidence levels that you desire or
can accept. The larger the sample size, the greater degree of accuracy,
not only for predictions of total population behavior, but also for the
degree of variation in that behavior.
This is the basis for determining confidence levels in predictability
of the test base compared to the entire target population. The larger the sample size, the smaller the standard error—the possibility that the test results will not mirror the behavior of
the target population. On the other hand, if your sample grows beyond a
certain size, you will not greatly increase your accuracy level, but
you will definitely incur more research costs.
Some Statistical Background
At least 100 test respondents should be selected from a probability
sample for all quantitative tests with the objective of 68 percent to 95
percent confidence levels in predictability of test results.
When sample sizes are at least 100, if the results are quantified and
displayed on a graph, the results will tend to approximate what is
called the "normal curve" of distribution. That is, the majority of
people will give you an "average" response, a smaller number will give
you a "below average" or an "above average" response, and a very small
number will give you an "exceptionally below average" or an
"exceptionally above average" response. This distribution is also known
as a bell curve. The mathematical probability that a given test
observation will fall within a range of values from the middle of this
normal distribution curve is called a "standard deviation."
There is a direct relationship between your sample size and the
degree of reliability, based on the statistically predictable behavior
of respondents' test results clustering in the pattern of a normal
curve. This is the basis for quantifying the confidence level of test
results, e.g., stating that you can have a 95 percent confidence level
that your test results mirror the general population.
Mathematically, under a normal curve, 68.3 percent of all
observations fall within plus or minus one standard deviation of the
middle of the curve; 95.5 percent of test observations fall within two
standard deviations of the middle of the normal curve and 99.7 percent
of test observations fall within three standard deviations. The key
point is that the larger the sample size, the greater the probability
that the test results will fall within one to two standard deviations of
the middle of the normal curve of population behavior.
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