ECONOMICS:
A World of Opportunity


ENTREPRENEURSHIP AND INNOVATION

MARKET RESEARCH

i) Key Principles of Market Research

  1. The goal of market research is to answer all of the following questions; Explain clearly and precisely and in detail WHY

    One of the surest tests of the strength of the demand for a new product is your ability to express all the reasons why the consumer would buy. Articulating these reasons is a important exercise in entrepreneurial endeavour. There is a direct correlation between number of reasons to buy and the likelihood of success.

  2. Strategic (Initial) Market Research answers these questions:
  3. The primary market research tool is direct conversation/query.

ii) Essential Steps to Market Research

The Role of Market Research

  1. Market research should begin as soon as there is even a glimmer of an idea for a new product. And market research should be on-going throughout the entire product development process.
  2. It is a mistake to conduct market research only after the product design has been tested and finalized. It is very expensive to discover at this late date that there is a particular design feature the consumer hates or that there is no viable market for this product at all.
  3. It is a mistake to believe that market research cannot be conducted before you have finalized design or prototype. You certainly can.
  4. Market research is the ally of the product developer. It leads to opportunity, refines that opportunity and guards against danger.
  5. Market research provides the following guidance:
    1. Is there any kind of reasonable demand for the broadly defined product you are considering?
    2. What particular features of the broadly-defined product would the consumer find most desirable?
    3. What particular features would the consumer find least desirable or positively undesirable?
    4. How much is the consumer willing to pay for the product?
    5. How much will you sell? To how many consumers? How much to each consumer?
    6. Even if some product can be sold profitably, is the total amount of the profit that can reasonably be expected enough to justify the expense of further research and development? Is the profit enough to justify the investment necessary to move this product into the marketplace?

    At the Earliest Stage

  6. As soon as possible write a single sentence description of your product. If you cannot, there is a problem with regard to the precision of your focus (ie. you do not know what it is you are try to do).
  7. Decide what existing alternative product or products your new product idea is competing against. And remember there always are alternatives. For example, someone might want to say that there are no alternatives to the video cassette recorder (VCR). But to say that is to think of the VCR as a piece of hardware, instead of a way to make consumers happy. When you look at the problem as a way to satisfy want, the alternatives become clear. The alternative to the recreational service provided by the VCR is going out to a theatre to see a movie, subscribing to pay-TV or rushing home from a party to view a favourite TV program.
  8. Once you have identified the best alternatives to your new product, in one paragraph describe why your product is better (assume your product would actually work even though it may still only be a concept. A paragraph is about the right length since the product advantages must be precisely described yet not be so unapparent that it takes a thousand words to make the point. If you cannot produce such a paragraph, it is probably time to go back to the drawing board.
  9. Now it is time to talk to those persons whom you think might be potential users of your product. It is too early to describe the product to them, but based on the work you did above ask them about their reactions to the existing alternative products. Ask probing questions about perceived deficiencies in the existing products. You are trying to find out indirectly if your improvements are valued by others. In the VCR example you would ask questions like: "Do you enjoy going out to the movies? Are you thinking of getting pay-TV?"
  10. Do not ask leading questions (to reinforce your opinions) like: "I hate going to the movies because there are weirdos in the audience and it costs so much, don't you think so?" You need honest answers to honest questions to prevent yourself from being led astray.
  11. Talk to a lot of people a lot about your product category. It is the height of arrogance to assume that because you think something is wonderful, everyone does.
  12. Listen very carefully. These conversations might alert you to a better avenue for improvement of this product than the one you were considering. But you will have to be listening with an open mind, listening for more than the confirmation of your foregone conclusion.
  13. If these conversations give you encouragement and keeping in mind any specific suggestions you heard, it is now appropriate to proceed with your product development work.
  14. But keep revising your single sentence and one paragraph descriptions. Keep watching for existing alternatives you might have missed previously. And keep talking to potential consumers.

    More Detailed Research

  15. As your product design become more refined, it is necessary to conduct more detailed market research.
  16. Consult regularly the trade journals which cover your product category. There is such a publication for just about every product imaginable. You read this magazine to learn about new products under development (hoping you do not read about the one you are developing) current problems and opportunities for this product type, how these products are advertised and marketed, and about estimates of sales volumes and projected growth.
  17. You research the market for the existing alternatives, products you have already identified. The following are examples of sources that will assist you to do so:

    Use the Directory of Associations in Canada to learn which trade association covers the product or industry. See what information they have. Statistics Canada has such materials as:

    Market Research Handbook
    Family Expenditure in Canada
    Retail Trade
    Retail Chain and Department Stores
    Department Store Sales and Stocks
    Statistics Canada Catalogue

    And there are many other library sources on business and industry, some in digital form. Warning, warning! Danger, danger! The Web can be used effectively to extract very useful market information. And, of course, it allows you to access other useful databases. But the Web is not necessarily representative of either an industry or a marketplace. Interest or activity on the Web does not necessarily reflect what is going on in the marketplace. The Web can be only one of your sources of information.

  18. Caution! You may not now estimate your sales on the assumption yo will take 100% of the market of the existing alternatives.
  19. Now decide who your most likely customers might be. You want to know at least their sex, age, educational level, income, occupation and location. It is ideal to know much more on the assumption you can never know too much about your market. You do this by logically deciding who might want your product and by learning who buys the competing alternatives.
  20. To do the latter, you conduct research into the specific companies that sell the competing alternatives and into the specific industry that produces them. This is best done by conducting an electronic data base search for information on these identified companies and on the industry. A good source for US companies and products is Lexis Nexis. What you will receive are articles from various media describing the industry and the companies within it. It is in these articles that you may find very useful information on the customers that buy the alternative products and on the marketing strategies of the companies that sell them.

    Many public libraries and almost all university libraries can provide the above services and their reference staffs will be glad to assist you.

  21. Having identified your most likely consumers (your target market) you count them. How many are there in the country, province or local area? Where exactly are they located? Big cities? Rural areas? All over? This information is available from Statistics Canada in most libraries.
  22. Estimate if you can what proportion of target consumers are buying the existing alternatives.
  23. It is now time to approach a sample of your target market and ask them to answer a questionnaire you have devised. The questions still focus on deficiencies of the existing alternative and do not describe your new product. Again, be alert for unexpected insights.
  24. Do a complete costing on your product. Be conservative. If anything, over-estimate.
  25. Launch a major redesign of your product to reduce cost.
  26. Using that cost figure, set several crude "test" prices with the usual mark-up to retail price (the mark-up varies by industry and channel of distribution. Find out the relevant value for your particular situation).
  27. Repeat the questionnaire sampling by including a general description of your product with the "test" prices. Ask whether they would buy. Check with your legal advisor to make sure your product description does not jeopardize your legal rights. And remember that fewer people will buy than say they will buy. See next point.
  28. Using all the information generated in the above steps, estimate your potential sales. This is a fairly complicated procedure and you may wish to seek professional advice and assistance

    Before Product Launch

  29. Assuming that the previous market research indicates a market large enough to generate a profit large enough to justify further development, refine your product design based on what has been learned.
  30. Do another costing
  31. Launch another cost-reduction effort
  32. Cost again.
  33. It is now time to do a complete and detailed market survey and estimate of sales. These numbers must be as dependable as possible since you will use them to make your next business judgments. Note that you need this information even if you do not intend to manufacture your product and wish merely to licence it. Without this market research you do not know the value of that which you wish to licence.
  34. You will now need some degree of professional advice and assistance from someone who is a specialist in market research.
  35. You have two basic choices: you can use professional advice to show you how to do the complete analysis, or you can hire someone to do the research for you.
  36. Hiring someone to conduct market research is expensive. Beware of a price that is too low; perhaps they are going to do only what you have already done above. In almost all cases, complete research requires a market survey with prices.
  37. The amount of research assistance you hire and the amount of money you spend should be proportionate to the reward you anticipate from your product. Expect a handsome reward and you should be prepared to spend heavily for research. Expect a more modest reward and you may have to do most of the research yourself. But make sure you do not take an excellent opportunity and starve it of the information it needs to grow.
  38. Choose your market research advice and assistance very carefully. Seek referrals from business persons who have used a particular person or company and who were well satisfied. Make sure all fees and charges are specified before the market researcher undertakes any work.
  39. Caution. All market research is an estimate of sales, a prediction. It is vital guidance, but it is not a guarantee. Nothing is actually sold until money changes hands.
  40. But without reliable market research you are pursuing your goal blindfolded. With it you can see what might be your future.

iii) Market Competition

Market research must document competitors, actual and anticipated.

The Competition: The Direct Alternatives (the products that solve a similar problem).

Identify the companies that provide these products and answer the following questions:

  1. How big are they?
    List them in order of sales volume of the particular product under consideration. List them in order of total sales or assets.
  2. Where are they?
    Specify the geographical area each competitor covers.
    Specify the target market that each competitor tries to serve.
  3. Who exactly is your active, immediate competitor?
    The Manufacturer?
    A distributor or wholesaler?
    A retail chain?
    Independent salespersons?
    Direct sales letter?
    Telephone salesperson?
    In other words, who is the most active promoter?
  4. Who are they in general? Assemble background information on all relevant participants in the competitive situation and answer the following questions.
  5. How do they compete?
    Do they advertise? What medium?
    What are their typical promotional activities?
    Do they have the reputation of being aggressive?
    How do they claim superiority? Price, quality, reliability, convenience, service, snob appeal, special expertise?
  6. How innovative are they?
    How often do they improve their products?
    Are they trying to expand their market?
    Do they initiate marketing moves or are they often reacting to the moves of others?
  7. How successful are they?
    Profits rising? Market share up?

    The Competition - The Financial Alternative

    Identifying the sources of financial alternatives can be difficult.

    A financial alternative is a product that while dissimilar in function or use to another product, it occurs to the consumer to think of them as alternatives. There must be some reason why it occurs to the consumer to make this comparison - the connecting circumstance.

    For example, stereo equipment and a home workshop could be financial alternatives if they are sold close to each other in a department store. Or a set of luggage and the transportation cost of a trip could be alternatives because the consumer thinks of them in sequence.

    In this situation, you are first looking for the competing situation, rather than the competing company. Then the competing company or companies must be considered.

    Sources of Strength of the Entrenched Competitors:

    1. The depths of their resources, especially financial and human
    2. Existing brand loyalty. Force of habit is on their side
    3. Established channels of distribution and access to distribution networks
    4. Volume buying power
    5. Their knowledge of the product and the market

    It is on the last point that your best chance to compete exists.

    But because of the power of the entrenched competitors, a slightly better product than theirs will likely fail (never mind a purely imitative one).

    Therefore, your new product has to be much better than the existing alternatives, that is, the utility/price inequality must be strongly in your favour.

    Is this making it seem that a successful new product introduction is almost impossible? Then let's look at the disadvantage of the existing (big) competitors.

    The Vulnerabilities of the Existing Competition:

    1. The inertia of their existing market and R&D directions
    2. Their long response time to changing consumer preferences
    3. Consumers buying their product from habit may becoming tired of it (diminishing utility)
    4. A sufficiently innovative product can bring the mightiest corporation to its knees

    Remember that by creating a new and better product you may have given yourself a measure of monopoly power. And monopoly power is real power.

    But a new product has no power until the consumer knows about it and can purchase it readily.

    Next Section: Networking

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    This page was last updated 02 July 1997.