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Market research basics

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The SmallBusiness.com WIKI Guide to Market research basics is a collaborative project created by users of the SmallBusiness.com WIKI. It provides an overview of basics related to this topic. Find more guides at The SmallBusiness.com WIKI Guides Hub.

Overview - What is Marketing Research?

According to the American Marketing Association, marketing research is the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services.

Every small business owner-manager must ask the following questions to devise effective marketing strategies:

  • 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?

Marketing research is not a perfect science. It deals with people and their constantly changing feelings and behaviors, which are influenced by countless subjective factors. To conduct marketing research you must gather facts and opinions in an orderly, objective way to find out what people want to buy, not just what you want to sell them.

Why Do It?

It is impossible to sell products or services that customers do not want. Learning what customers want, and how to present it attractively, drives the need for marketing research. Small business has an edge over larger concerns in this regard. Large businesses must hire experts to study the mass market, while small-scale entrepreneurs are close to their customers and can learn much more quickly about their buying habits. Small business owners have a sense their customers' needs from years of experience, but this informal information may not be timely or relevant to the current market.

Marketing research focuses and organizes marketing information. It ensures that such information is timely and permits entrepreneurs to:

  • Reduce business risks
  • Spot current and upcoming problems in the current market
  • Identify sales opportunities
  • Develop plans of action

How to Do It - The Process

Without being aware of it, most business owners do market research every day. Analyzing returned items, asking former customers why they've switched, and looking at competitor's prices are all examples of such research. Formal marketing research simply makes this familiar process orderly. It provides a framework to organize market information.

Step One - Define Marketing Problems and Opportunities

Market research, like other components of marketing such as advertising, can be quite simple or very complex. You might conduct simple market research such as including a questionnaire in your customer bills to gather demographic information about your customers. On the more complex side, you might engage a professional market research firm to conduct primary research to aid you in developing a marketing strategy to launch a new product.

Regardless of the simplicity or complexity of your marketing research project, you'll benefit by reviewing the following seven steps in the market research process.

Step One: Define Marketing Problems and Opportunities

The market research process begins with identifying and defining the problems and opportunities that exist for your business, such as:

  • Launching a new product or service.
  • Low awareness of your company and its products or services.
  • Low utilization of your company's products or services. (The market is familiar with your company, but still is not doing business with you.)
  • A poor company image and reputation.
  • Problems with distribution, your goods and services are not reaching the buying public in a timely manner.

Step Two - Set Objectives, Budget and Timetables

Objective: With a marketing problem or opportunity defined, the next step is to set objectives for your market research operations. Your objective might be to explore the nature of a problem so you may further define it. Or perhaps it is to determine how many people will buy your product packaged in a certain way and offered at a certain price. Your objective might even be to test possible cause and effect relationships. For example, if you lower your price by 10 percent, what increased sales volume should you expect? What impact will this strategy have on your profit?

Budget: How much money are you willing to invest in your market research? How much can you afford? Your market research budget is a portion of your overall marketing budget. A method popular with small business owners to establish a marketing budget is to allocate a small percentage of gross sales for the most recent year. This usually amounts to about two percent for an existing business. However, if you are planning on launching a new product or business, you may want to increase your budget figure, to as much as 10 percent of your expected gross sales. Other methods used by small businesses include analyzing and estimating the competition's budget, and calculating your cost of marketing per sale.

Timetables: Prepare a detailed, realistic time frame to complete all steps of the market research process. If your business operates in cycles, establish target dates that will allow the best accessibility to your market. For example, a holiday greeting card business may want to conduct research before or around the holiday season buying period, when their customers are most likely to be thinking about their purchases.

Step Three - Select Research Types, Methods and Techniques

There are two types of research: primary research or original information gathered for a specific purpose and secondary research or information that already exists somewhere. Both types of research have a number of activities and methods of conducting associated with them. Secondary research is usually faster and less expensive to obtain that primary research. Gathering secondary research may be as simple as making a trip to your local library or business information center or browsing the Internet.

Step Four - Design Research Instruments

The most common research instrument is the questionnaire. Keep these tips in mind when designing your market research questionnaire.

  • Keep it simple.
  • Include instructions for answering all questions included on the survey.
  • Begin the survey with general questions and move towards more specific questions.
  • Keep each question brief.
  • If the questionnaire is completed by the respondent and not by an interviewer or survey staff member, remember to design a questionnaire that is graphically pleasing and easy to read.
  • Remember to pre-test the questionnaire. Before taking the survey to the printer, ask a few people-such as regular customers, colleagues, friends or employees-to complete the survey. Ask them for feedback on the survey's style, simplicity and their perception of its purpose.
  • Mix the form of the questions. Use scales, rankings, open-ended questions and closed-ended questions for different sections of the questionnaire. The "form" or way a question is asked may influence the answer given. Basically, there are two question forms: closed-end questions and open-end questions.

Close-end questions - Respondents choose from possible answers included on the questionnaire. Types of close-end questions include:

  • Multiple choice questions which offer respondents the ability to answer "yes" or "no" or choose from a list of several answer choices.
  • Scales refer to questions that ask respondents to rank their answers or measure their answer at a particular point on a scale. For example, a respondent may have the choice to rank their feelings towards a particular statement. The scale may range from "Strongly Disagree", "Disagree" and "Indifferent" to "Agree" and "Strongly Agree."

Open-end questions - Respondents answer questions in their own words. Completely unstructured questions allow respondents to answer any way they choose. Types of open-end questions include:

  • Word association questions ask respondents to state the first word that comes to mind when a particular word is mentioned.
  • Sentence, story or picture completion questions ask respondents to complete partial sentences, stories or pictures in their own words. For example, a question for commuters might read: "My daily commute between home and office is _____ miles and takes me an average of ______ minutes. I use the following mode of transportation: _______."

Mistakes to avoid - When drafting a survey or questionnaire, the goal is to receive meaningful and useful information for the development of future marketing strategies. Thus, when formulating questions, be sure to guard against the following mistakes:

  • Leading Questions - The questions should avoid leading the consumer to make statements about a particular product, brand, service, or experience. For example, the question "Why do you like brand X over brand Y?" leads the respondent to make statements favoring brand X.
  • Ambiguous Questions - Using words that do not have a set definition leave room for different interpretations by the respondents. Using the word "regularly," for example, may mean only once a week to one respondent or once a month to another.
  • Unanswerable Questions - These questions usually ask the respondent to recall some experience that they either will not remember at all or will not remember accurately. For example, an ice cream company might ask respondents when they ate their first ice cream sundae, but many respondents will not honestly be able to recall that experience.
  • Two Questions in One - Questions should be simple and concise, and whenever possible, break questions into multiple parts. For instance, continuing with the ice cream example, suppose one of the questions asked, "Do you eat chocolate ice cream and vanilla ice cream?" This question poses a problem to respondents who eat one type of ice cream but not the other. Dividing the original question into two smaller questions would solve this problem.
  • Irrelevant Questions - Before distributing your survey to the respondents, each question should be analyzed to determine exactly what information you hope to gain from a response.
  • Forgetting Demographics - Demographics are extremely important to marketing research because they allow the analyst to develop new insights into market segments and perhaps even assist in the development of a multi-cultural marketing campaign. However, demographic information can be perceived as mildly offensive to the participant, as a result; any questions regarding age, gender, income, etc. should be located at the rear of the questionnaire.

Step Five - Collect Data

To help you obtain clear, unbiased and reliable results, collect the data under the direction of experienced researchers. Before beginning the collection of data, it is important to train, educate and supervise your research staff. An untrained staff person conducting primary research will lead to interviewer bias.

Stick to the objectives and rules associated with the methods and techniques you have set in Step Two and Step Three. Try to be as scientific as possible in gathering your information.

Step Six - Organize and Analyze Data

Once your data has been collected, it needs to be "cleaned." Cleaning research data involves editing, coding and the tabulating results. To make this step easier, start with a simply designed research instrument or questionnaire.

Some helpful tips for organizing and analyzing your data are listed below.

  • Look for relevant data that focuses on your immediate market needs.
  • Rely on subjective information only as support for more general findings of objective research.
  • Analyze for consistency; compare the results of different methods of your data collection. For example, are the market demographics provided to you from the local media outlet consistent with your survey results?
  • Quantify your results; look for common opinions that may be counted together.
  • Read between the lines. For example, combine U.S. Census Bureau statistics on median income levels for a given location and the number of homeowners vs. renters in the area.

Step Seven - Present and Use Marketing Research Findings

Once marketing information about your target market, competition and environment is collected and analyzed, present it in an organized manner to the decision makers of the business. For example, you may want to report your findings in the market analysis section of your business plan. Also, you may want to familiarize your sales and marketing departments with the data or conduct a company-wide informational training seminar using the information. In summary, the resulting data was created to help guide your business decisions, so it needs to be readily accessible to the decision makers.

Define the Problem or Opportunity

The first step of the research process, defining the problem or opportunity, is often overlooked - but it is crucial. The root cause of the problem is harder to identify than its obvious manifestations; for example, a decline in sales is a problem, but its underlying cause is what must be corrected. To define the problem, list every factor that may have influenced it, then eliminate any that cannot be measured. Examine this list while conducting research to see if any factors ought to be added, but don't let it unduly influence data collection.

Assess Available Information

Assess the information that is immediately available. It may be that current knowledge supports one or more hypotheses, and solutions to the problem may become obvious through the process of defining it. Weigh the cost of gathering more information against its potential usefulness.

Gather Additional Information

Before considering surveys or field experiments, look at currently held information: sales records, complaints, receipts, and any other records that can show where customers live and work, and how and what they buy. One small business owner found that addresses on cash receipts allowed him to pinpoint customers in his market area. With this kind of information he could cross-reference his customers' addresses and the products they purchased to check the effectiveness of his advertising.

Customers' addresses tell much about them. Lifestyles - and buying habits - are often correlated with neighborhoods.

Credit records are an excellent source of information, giving information about customers' jobs, income levels, and marital status. Offering credit is a multifaceted marketing tool with well-known costs and risks.

Employees may be the best source of information about customer likes and dislikes. They hear customers' minor gripes about the store or service - the ones customers don't think important enough to take to the owner. Employees are aware of the items customers request that you do not stock. They can often supply good customer profiles from their day-to-day contacts.

Outside Data

Secondary Research

Secondary research exploits published sources like surveys, books, and magazines, applying or rearranging the information in them to bear on the problem or opportunity at hand. A tire sales business owner might guess that present retail sales of tires is strongly correlated with sales of new cars three years ago. To test this idea, it's easy to compare new car sales records with replacement tire sales three years later. Done over a range of recent years, this should prove or disprove the hypothesis and help marketing efforts tremendously.

Localized figures tend to provide better information as local conditions might buck national trends. Newspapers and other local media are often quite helpful.

There are many sources of secondary research material. It can be found in libraries, colleges, trade and general business publications, and newspapers. Trade associations and government agencies are rich sources of information - GALES' Directory is available at any public library.

Sources of Secondary Research

Primary Research

Primary research can be as simple as asking customers or suppliers how they feel about a business or as complex as surveys conducted by professional marketing research firms. Direct mail questionnaires, telephone surveys, experiments, panel studies, test marketing, and behavior observation are all examples of primary research.

Primary research is often divided into reactive and non-reactive research. Non-reactive primary research observes how real people behave in real market situations without influencing that behavior even accidentally. Reactive research, including surveys, interviews, and questionnaires, is best left to marketing professionals, as they can usually get more objective and sophisticated results.

Those who can't afford high-priced marketing research services should consider asking nearby college or university business schools for help.

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