How to Profit from Market Research
Knowing what your customers want and how they want it is essential to any business. Here's how to gather information through market research.
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Let's face it: No business can sell goods and services that customers don't want and still make money. That's why market research comes in handy. Discovering what consumers want, when they want it, and how they want it packaged or delivered is essential to launching and/or running a business these days. Big businesses hire experts to analyze the market. Small businesses are often closer to their customer base and can get a sense of buying habits, future needs, or other trends. But just how useful is this informal data and when should small firms conduct broader market research?
If the "market" is viewed as the totality of all environmental factors that bear down on a business, market research may be defined as a disciplined investigation aimed at discovering what is going on and, most importantly, on what is changing in the environment. The object is to discover opportunities and threats—and to assess how some intended action might play itself out. The research may be designed broadly or narrowly, but even limited studies must have sufficient scope to give the investigation context.
The pages that follow will discuss why to conduct market research and how to profit from doing it successfully.
Deciding to Conduct Market Research
Without calling it market research, most businesses already conduct some form when they look at competitor's prices or service offerings, talk to customers about their needs, and try to figure out why products were returned or services discontinued. The question is when and if a business should formalize this research. The benefits of market research include the following:
- identifying potential sales,
- lessening business risks,
- identifying problems in the market,
- and focusing on a plan of attack.
You may have a variety of motives for undertaking formal market research. The context may be negative (declining profitability or sales) or positive (new technology, rapid growth). You may be motivated by forces outside the company's control such as new laws, the state of the economy, changing technology, or a new competitor in the market. Most start-ups that need front-end funding begin their careers by doing a comprehensive market study in order to put the results into a business plan.
Useful market research has a time element. It will present a history of developments and include a projection of future events. A manager wants to make decisions about what to do next and therefore needs a look at the future. Projecting data forward requires special but somewhat opposing skills: statistical expertise on the one hand and an inspired, open, and yet sober sort of gaze. Market research that merely confirms management's prejudices, hopes, or fears is worth little -- but the findings, of course, may do just that. Managements often do see the future accurately.
Elements of Successful Market Research
In order to devise an effective marketing strategy, the U.S. Small Business Administration recommends you do down the following checklist and first answer these questions about your business:
- Who are my customers and potential customers?
- What kind of people are they?
- Where do they live?
- Can and will they buy?
- Am I offering the kinds of goods or services they want at the best place, at the best time, and in the right amounts?
- Are my prices consistent with what buyers view as the product's value?
- Are my promotional programs working?
- What do customers think of my business?
- How does my business compare with my competitors?
Now that you have the basics down, it's time to consider the various elements that go into market research.
Market Size and Structure
Market size is an important aspect of orientation in business: it tells the owner how he or she is doing. Measuring market size at the national level is easy, at the local level difficult and costly. The government collects data at the county level in a series called the County Business Patterns (CPB), but the CPB only reports establishments, employment, and payroll. Product detail is not available. Nonetheless, CBP data are the most objective look at what is happening locally. Data from the CBP, combined with averages on shipments or revenues at the national level, can produce an estimate of the market size for broad industry categories locally. Where an activity is visible (e.g., picture framing shops), market size can be approximated by looking at telephone directories and using an average sales volume. Federal data for framing shops will not be available because the activity is "too detailed." Therefore alternative approaches are necessary. Where only factories are visible, local sales are very difficult to estimate, but the "production market" may be estimated similarly.
At the local level the structure of the market -- its divisions into products, its channels of distribution, its concentration -- are also subject more to guesswork than study. Telephone surveying is the method most likely to yield reasonable results, but such work is very expensive.
Not surprisingly, most small businesses develop a sense of their market in the course of day-to-day operations -- rather than by spending thousands of dollars on studies. They talk with vendors, customers, and competitors. They listen to the gossip and translate bits and pieces of information into rough numbers. This process is rarely -- but can be -- formalized. A small business owner and his and her key managers can sit down with notepads and work out the market size and structure. Sometimes this is useful for planning or for justifying loan applications. At the local level, disciplined recording and analysis of such information yields results comparable to very expensive studies at the larger scale -- and looking at CBP data can produce rough confirmation.
Market Share and Competition
An important aspect of every market is its concentration, measured by creating a list of participants, sorting them by sales, and then adding up the market shares of the top layer -- the top five, the top three. If the top three have most of the market, the industry is highly concentrated; if the top five have around 15 to 20 percent, concentration is low. Most market share listings have an "All Other" category. Small businesses are invariably hidden in that line. The sales volumes of small operations are rarely available publicly, but "work arounds" are available to infer their size. Important measures are employment and square footage. A "typical" small business can calculate its own sales per square foot in retail, for instance -- or its sales per employee -- and can then proceed to develop approximate company size estimates for its competitors by applying the same unit measures to them after counting their people and eyeballing their floor space. There are all kinds of other "proxy" measures available. A ready-mix concrete supplier knows his/her revenues per truck -- and can count competitors' trucks. Economic forces tend always to produce the same averages across an industry.
