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.
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Market research answers questions along the following lines: How big is the market and how does it divide?— into product lines or services or geographically? Who are the buyers and why do they buy? Who is the competition and what methods are they using? What’s on the horizon that will change this market? How will we benefit or suffer if these changes take place? Managements undertake such research for some motive; thus market research always has a context. The context may be negative (declining profitability or sales) or positive (new technology, rapid growth); it may be brought about by forces outside the company’s control such as legislative events, the economy as a whole, a new entrant to 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.
Company size is itself a context, and while, in general, business is business at any scale, problems and opportunities manifest differently. Managements in large organizations, for example, are inevitably at a much greater distance from the actual interface where customers and products meet—where the action is. Small business owners are closer to the market but rarely have vast resources at their command. Distance from the market and the extent of it that must be surveyed influences the techniques deployed. Market research may take the simple form of driving around and talking to a lot of people—or just parking someplace and counting the number of cement trucks a competitor sends out. At the other extreme, it may cost hundreds of thousands of dollars and may even involve undertaking test marketing in several cities.
A general rule of market research is that costs vary inversely with level of detail and currency. A business can get a broad view of a market by finding free materials at the library. Expert studies on a national or global market cost between $150 to $700 (depending on the subject).
But a business wishing to have detailed information at the county level on some cluster of products is looking at minimally $3,000 for a commissioned study—and more likely four times that. Baseline economic data are collected by the U.S. Bureau of the Census. These are better at the aggregate than at the detailed level. Good data on specific products are simply not there, but data on physical products are better than on services. The Bureau collects fewer data on service sectors and these at a rougher granularity. The future auto dealer, in other words, has an easier job plotting the future than the future independent midwife. Government data are invariable three-or-more years old when they become available. Collecting current, real-time data is very costly.
Grocery chains collect such data digital at the check-out counter, but access to it runs into hundreds of thousands of dollars.
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.
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, 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.
Competitive strategies are also accessible to the small business. The method of detecting such strategies will depend, of course, on the relative visibility of the competitor. Retail stores advertise; the frequency of their sales and the items they use as loss leaders indicate strategy.
They can be visited. Vendors are a useful source of information on less visible competitors’ strategies—as are observations of such companies at trade shows. The alert small business owner will constantly watch his or her competitors and note when they enlarge their leases, build, or pave their parking lots—or when their inventories overflow to the parking lots. Problems that they encounter also leave tell-tale signs. When such observation becomes routine—and when the owner collects ads, news stories, and records observation in notes—doing a market share and competitive analysis for a plan will be relatively easy.
Products Research and Consumer Surveys A small business intending to test products before launching them to the market will expose them to employees, friends, customers, relatives, vendors, suppliers—anyone at all with a likely opinion—and will thus gradually discover what seems to be the best design, positioning, packaging, name, and even marketing slogan. The more systematic this type of exposure is—and the more effectively informants’ opinions are recorded and analyzed— the more it will resemble the practices of large organizations who deploy sophisticated methodologies like focus groups and consumer surveys.
In general “sophistication” translates into disciplined planning of tests and the application of specialized expertise in that planning. Focus groups and customer surveys frequently employ psychologists before a trial (preparing settings, choosing respondents, framing questionnaires, etc.), during a trial (observing reactions), and after the trial (analyzing results). But, in effect, a high level of sophistication is simply an attempt to formalize and then to apply mechanically what is nothing other than good entrepreneurial “feel” and “instinct.” Many a very successful product was launched because the entrepreneur simply liked it—and so did the people around him or her.
Small businesses generally lack the resources for massive, costly trials and surveys and, instead, rely on innovative ways to obtain consumer feedback. A store, for instance, may mount two very different product displays and then instruct the clerks to note which one the customers spend more time examining. Surveys can be conducted at very modest costs by simply asking every customer a question at checkout time—and then recording the answer. Such approaches may lack the “scientific” halo of big studies but will produce actionable and reliable results if properly done.
Keeping record of informal events is another lowcost method to accomplish in a small business what large companies spend huge amounts achieving. Customers complain. Customers make complimentary comments.
Customers criticize products or comment on them. To jot down such comments with appropriate annotations, to collect them in one place, periodically to review them can be a source of intelligence on customer satisfaction.
Other Market Influences An important component of all market research is identification and assessment of forces external to the market itself—but likely to influence it. A classical example of government action for a small business might be the routing of a freeway; it could isolate the business from major parts of its clientele or massively increase its traffic. External influences include government, as already mentioned, which can by its enactments increase pay (up minimum wage) or returns (accelerate depreciation), impose costs by regulation, modify interest rates, stimulate or inhibit exports, and do hundreds of other things. Changes in demographic patterns were underway in the mid-2000s as the baby boom generation marched toward retirement, eroding some markets, swelling others. International events may have great influence by disturbing raw material or energy availability or stimulating competition (outsourcing). Technological change of a massive character impacted communications and distribution by means of the Internet—but less visible changes, like improvements in materials or equipment have sometimes dramatic impacts of a particular business too.
In most industries, insiders watch certain indicators vital to the industry: interest rates in residential construction are an example; housing starts, in turn, send signals to a large number of suppliers, e.g., producers of appliances. Publishers of references watch budgetary trends in libraries. Hotels and resorts watch gas prices and air travel costs. And so on. The small business doing market research may find it more difficult to find precise indicators that serve as signal for its operations. One way to identify them is to spend some time with trade publications which like to track and publicize changes in relevant second- and third-order influences on the market.
Research Tools And Techniques
Most formalized market research techniques are used by large corporations to “see” a market difficult to track by its very diversity and size. Major categories are 1) audience research, 2) product research, 3) brand analysis, 4) psychological profiling, 5) scanner research, 6) database research, also called database “mining,” and 7) post-sale or consumer satisfaction research. When these techniques involve people, researchers use questionnaires administered in written form or person-to-person, either by personal or telephone interview; questionnaires may be closed-end or open-ended; the first type provides users choices to a question (“excellent,” “good,” “fair”) whereas open-ended surveys solicit spontaneous reactions and capture these as given. Focus groups are a kind of opinion-solicitation but without a questionnaire; people interact with products, messages, or images and discuss them. Observers evaluate what they hear.
Some major techniques are intimately linked with targeting marketing efforts or designing messages.
Audience research is aimed at discovering who is listening, watching, or reading radio, TV, and print media respectively. Such studies in part profile the audience and in part determine the popularity of the medium or portions of it.
Brand research has similar profiling features (“Who uses this brand?”) and also aims at identifying the reasons for brand loyalty or fickleness. Psychological profiling aims at construction profiles of customers by temperament, lifestyle, income, and other factors and tying such types to consumption patterns and media patronage.
Scanner research uses checkout counter scans of transactions to develop patterns for all manner of end uses, including stocking, of course. From a marketing point of view, scans can also help users track the success of coupons and to establish linkages between products.
Database mining attempts to exploit all kinds of data on hand on customers—which frequently have other revealing aspects. Purchase records, for example, can reveal the buying habits of different income groups—the income classification of accounts taking place by census tract matching. Data on average income by census tract can be obtained from the Bureau of the Census.
Product tests, of course, directly relate to use of the product. Good examples are tasting tests used to pick the most popular flavors—and consumer tests of vehicle or device prototypes to uncover problematical features or designs.
Post-consumer surveys are familiar to many consumers from telephone calls that follow having a car serviced or calling help-lines for computer- or Internet-related problems. In part such surveys are intended to determine if the customer was satisfied. In part this additional attention is intended also to build good will and wordof-mouth advertising for the service provider.
See also: Focus Groups