It is unlikely that you will already have the answers to all the important questions concerning your marketplace. The purpose of the market research element of the workbook is to ensure you have sufficient information on customers, competitors and markets so that your market entry or expansion strategy is at least on the target, if not the bullseye itself. In other words, enough people want to buy what you want to sell at a price that will give you a viable business. If you miss the target completely, you may not have the resources for a second shot.
One of the sad aspects of new business starts is that often the one-in-three failure rate for businesses in the first three years of life involves someone investing a lump-sum payment received from a previous redundancy, through taking early retirement, or from an inheritance. It is one of the paradoxes of small businesses that whereas you cannot start without investing some time and money, it may be safer to have more time than money. Those with their own money frequently have less pressure from banks or financial investors to research their ideas thoroughly first, simply because they do not have to go to see the bank manager in the early stages to obtain support before starting. Those with time but inadequate resources always have to seek advice before starting, and inevitably this will include researching the market as widely as possible before commencing. You do not have to open a shop to prove there are no customers for your goods or services; frequently some modest DIY market research beforehand can give clear guidance as to whether your venture will succeed or not.
The purpose of practical DIY market research for entrepreneurs investigating or seeking to start a new business is, therefore, twofold:
Otherwise, ‘fools rush in, where angels fear to tread’; or, as they say in the army, ‘time spent in reconnaissance is rarely time wasted’. The same is certainly true in starting a business, where you will need to research in particular:
Research, above all else, is not just essential in starting a business, but once it is launched, must become an integral part in the ongoing life of the company. Customers and competitors change; products have life cycles. Once started, however, ongoing market research becomes easier, as you will have existing customers (and staff) to question. It is important that you monitor regularly their views on your business (as the sign in the barber shop stated: ‘We need your head to run our business’) and develop simple techniques for this purpose (eg touch screens, questionnaires for customers beside the till, suggestion boxes with rewards for employees).
Researching the market need not be a complex process, nor need it be very expensive. The amount of effort and expenditure needs to be related in some way to the costs and risks associated with the business. If all that is involved with your business is simply getting a handful of customers for products and services that cost little to put together, then you may spend less effort on market research than you would for, say, launching a completely new product or service into an unproven market that requires a large sum of money to be spent up front.
However much or little market research you plan to carry out, the process needs to be conducted systematically. These are the seven stages you need to go through to make sure you have properly sized up your business sector.
Before embarking on your market research you should first set clear and precise objectives, rather than just setting out to find interesting general information about the market. The starting point for a business idea may be to sell clothes, but that is too large and diverse a market to get a handle on. So, that market needs to be divided into, say, clothes for men, women and children, then further divided into clothes for working, leisure, sport and social occasions. This process is known as segmenting the market. A further segment could cover special occasions such as weddings. Even once you have narrowed your idea down to, say, smart clothes for women, the definition of what is smart will differ for each age group. Most businesses end up selling to several different market segments, but when it comes to detailed market research you need to examine each of your main segments separately.
So, for example, if you are planning to open a shop selling to young fashion-conscious women, among others, your research objective could be: to find out how many women aged 18 to 28, with an income of over £25,000 a year, live or work within two miles of your chosen shop position. That would give you some idea whether the market could support a venture such as this.
Knowing the size of the market, in the example given above, may require several different pieces of information. For example, you would need to know the size of the resident population, which might be fairly easy to find out, but you might also want to know something about people who come into the catchment area to work, for leisure purposes, on holiday or for any other major purpose. There might, for example, be a hospital, library, railway station or school nearby that also pulls potential customers to that particular area.
This will involve either desk research in libraries or on the internet, or field research, which you can do yourself or get help in doing. Some of the most important of these areas were covered earlier in this chapter.
Field research – that is, getting out and asking questions yourself – is the most fruitful way of gathering information for a home-based business.
Market research will not be free even if you do it yourself. At the very least there will be your time. There may well be the cost of journals, phone calls, letters and field visits to plan for. At the top of the scale could be the costs of employing a professional market research firm.
Starting at this end of the scale, a business-to-business survey comprising 200 interviews with executives responsible for office equipment purchasing decisions cost one company £/$/€12,000. Twenty in-depth interviews with consumers who are regular users of certain banking services cost £/$/€8,000. Using the internet for web surveys is another possibility, but that can impose too much of your agenda onto the recipients and turn them away from you.
Check out companies such as Free Online Surveys (http://free-online-surveys.co.uk) and Zoomerang (www.zoomerang.com/web/signup/Basic.aspx) which provide software that lets you carry out online surveys and analyse the data quickly. Many such organizations offer free trials.
Doing the research yourself may save costs but may limit the objectivity of the research. If time is your scarcest commodity, it may make more sense to get an outside agency to do the work. Using a reference librarian or university student to do some of the spadework need not be prohibitively expensive. Another argument for getting professional research is that it may carry more clout with investors.
Whatever the cost of research, you need to assess its value to you when you are setting your budget. If getting it wrong would cost £/$/€100,000, then £/$/€5,000 spent on market research might be a good investment.
If you cannot find the data you require from desk research, you will need to go out and find the data yourself. The options for such research are described in the next section, under ‘Field research’.
It is rarely possible or even desirable to include every possible customer or competitor in your research. So you have to decide how big a sample you need to give you a reliable indication how the whole population will behave.
The raw market research data needs to be analysed and turned into information to guide your decisions on price, promotion and location, and the shape, design and scope of the product or service itself.
There are two main types of research in starting a business:
Both activities are vital for the starter business.
There is increasingly a great deal of secondary data available in published form, and accessible either online or via business sections of public libraries throughout the United Kingdom to enable new home-business starters to quantify the size of market sectors they are entering and to determine trends in those markets. In addition to populations of cities and towns (helping to start quantification of markets), libraries frequently purchase Mintel reports, involving studies of growth in different business sectors. Government statistics, showing trends in the economy, are also held (Annual Abstracts for the economy as a whole, Business Monitor for individual sectors).
If you plan to sell to companies or shops, Kompass and Kelly’s directories list all company names and addresses (including buyers’ telephone numbers). Many industrial sectors are represented by trade associations, which can provide information.
If your market is very confined, the local telephone directory may have all the information you need to list your competitors. If you have to look further to cover a wider geography, including overseas, there are numerous directories that list businesses by trade, area and size.
Aside from the names and basic contact details you will need to find out some facts about your competitors, what they do, how they are organized, what their turnover, profit and financial structure are and whether or not they are privately owned or part of a larger group of businesses. You need this information to see how to compete and decide whether or not the business area looks profitable.
These sources will provide much of the background data on the businesses and customers in your market:
The internet is a rich source of market data, much of it free and immediately available. But you can’t always be certain that the information is reliable or free of bias, as it can be difficult if not impossible to always work out who exactly is providing it. That being said, you can get some valuable pointers to whether or not what you plan to sell has a market, how big that market is and who else trades in that space. The following sources should be your starting point:
If you are contemplating opening a classical music shop in Exeter focused on the young, while desk research might reveal that out of a total population of 250,000 there are 25 per cent of under 30-year-olds, it will not state what percentage are interested in classical music or how much they might spend on classical CDs. Field research (questionnaire in street) provided the answer of 1 per cent and £2 a week spend, suggesting a potential market of only £65,000 a year (250,000 × 25 per cent × 1 per cent × £2 × 52). The entrepreneurs decided to investigate Birmingham and London instead! But at least the cost had only been two damp afternoons spent in Exeter, rather than the horrors of having to dispose of the lease of an unsuccessful shop.
Fieldwork is big business in the United Kingdom, where market research companies pull in around £1 billion a year from survey work. Most fieldwork carried out consists of interviews, with the interviewer putting questions to a respondent. We are all becoming accustomed to it, whether being interviewed while travelling on a train, or resisting the attempts of enthusiastic salespeople posing as market researchers on doorsteps (‘sugging’, as this is known, is illegal, though you might be forgiven for believing otherwise). The more popular forms of interview are currently:
Personal interviews and postal surveys are clearly less expensive than getting together panels of interested parties or using expensive telephone time. Telephone interviewing requires a very positive attitude, courtesy, and an ability to not talk too quickly and listen while sticking to a rigid questionnaire. Low response rates on postal services (less than 10 per cent is normal) can be improved by including accompanying letters explaining the questionnaire’s purpose and why respondents should reply, by offering rewards for completed questionnaires (a small gift), by sending reminder letters and, of course, by providing prepaid reply envelopes. Personally addressed e-mail questionnaires have secured higher response rates – as high as 10–15 per cent – as recipients have a greater tendency to read and respond to e-mail received in their private e-mail boxes. However, unsolicited e-mails (‘spam’) can cause vehement reactions. The key to success is the same as with postal surveys – the mailing should feature an explanatory letter and incentives for the recipient to ‘open’ the questionnaire.
All methods of approach require considered questions. In drawing up the questionnaire attention must be paid first to these issues:
When you are sure of the above, and only then, you are ready to design the questionnaire. There are six simple rules to guide this process:
The introduction to a face-to-face interview is important; make sure you are prepared, either carrying an identifying card (eg student card, Association of Market Researchers watchdog card) or have a rehearsed introduction (eg ‘Good morning, I’m from Manchester University [show card] and we are conducting a survey and would be grateful for your help’). You may also need visuals of the product you are investigating (samples, photographs), to ensure the respondent understands. Make sure these are neat and accessible. Finally, try out the questionnaire and your technique on your friends, prior to using them in the street. You will be surprised at how questions that seem simple to you are incomprehensible at first to respondents!
The size of the survey undertaken is also important. You frequently hear of political opinion polls taken on samples of 1,500–2,000 voters. This is because the accuracy of your survey clearly increases with the size of sample, as Table 6.1 shows.
Table 6.1
|
Size of random sample |
95 per cent of surveys are right within … percentage points |
|
250 |
6.2 |
|
500 |
4.4 |
|
750 |
3.6 |
|
1,000 |
3.1 |
|
2,000 |
2.2 |
|
6,000 |
1.2 |
So if on a sample size of 600, your survey showed that 40 per cent of women in the town drove cars, the true proportion would probably lie between 36 and 44 per cent. For small businesses, we usually recommend a minimum sample of 250 completed replies.
Remember above all, however, that questioning is by no means the only or most important form of fieldwork. Sir Terence Conran, when questioned on a radio programme, implied that he undertook no market research fieldwork (ie formal interviews) at all. Later in the programme he confessed, nonetheless, to spending nearly ‘half of his time visiting competitors, inspecting new and rival products, etc’. Visiting exhibitions and buying and examining competitors’ products (as the Japanese have so painfully done, in disassembling piece-by-piece competitor cars, deciding in the process where cost-effective improvements could be made) are clearly important fieldwork processes.
Interpreting data using statistics can be difficult for the uninitiated. Check out these websites to get some help. You can get free tutorials on this and other aspects of statistics at Web Interface for Statistics Education (wise.cgu.edu). Web-Enabled Scientific Services & Applications (www.wessa.net/slr.wasp) has software, which covers almost every type of statistical calculation. For help in understanding statistical techniques, read The Little Handbook of Statistical Practice by Gerard E Dallal of Tufts, available free online (www.tufts.edu/~gdallal/LHSP.htm). At Princeton’s website (http://dss.princeton.edu/online_help/analysis/analysis.htm) you can find a tutorial and lecture notes on the subject as taught to its Master of International Business students.
The ultimate form of market research is to find some real customers to buy and use your product or service before you spend too much time and money in setting up. The ideal way to do this is to sell into a limited area or small section of your market. In that way if things don’t quite work out as you expect you won’t have upset too many people.
This may involve buying in as small a quantity of the product as you need to fulfil the order so that you can fully test your ideas. Once you have found a small number of people who are happy with your product, price, delivery/execution and have paid up, then you can proceed with a bit more confidence than if all your ideas are just on paper.
Pick potential customers whose demand is likely to be small and easy to meet. For example if you are going to run a bookkeeping business, select five to 10 small businesses from an area reasonably close to home and make your pitch. The same approach would work with a gardening, babysitting or any other service-related venture. It is a little more difficult with products, but you could buy a small quantity of similar items in from a competitor or make up a trial batch yourself.
Selling from stalls on a Saturday, or taking part in an exhibition, gives an opportunity to question interested customers and can be the most valuable fieldwork of all. All methods are equally valid, and the results of each should be carefully recorded for subsequent use in presentation and business plans.
Once the primary market research (desk and field research) and market testing (stalls and exhibitions) are complete, pilot testing of the business should be undertaken in one location or customer segment, prior to setting targets and subsequently measuring the impact of a full regional launch.
CASE STUDY Rococo
Chantal Coady was seeking to open a continental chocolate shop in the lower King’s Road, London. Hesitating, because of the size of the annual rent (£30,000 pa at 2011 prices) and premium sought for the premises (£170,000 at 2011 prices), Chantal decided to carry out some market research to see whether there would be enough interested passing customers to carry these heavy costs. The questionnaire used, together with results and comments on this useful exercise, is shown below. Chantal’s business, Rococo (www.rococochocolates.com) is still based in the same area of London. Rococo now has outlets in Belgravia, Chelsea, Marylebone, Chester and Covent Garden. They have hundreds of stockists across the globe from Seattle to Hong Kong. Turnover is in excess of £4m a year.
Figure 6.1 Questionnaire for Chantal Coady’s ‘Rococo’ chocolate shop
Date: Location: Time:
Every day Every week Once a month Special occasions
Bars
Boxes
Loose chocs
Supermarket
Sweet shop
Woolworths
Specialist shop
Other
Some people enjoy receiving chocs as a gift – where would you put yourself on this scale?
OverjoyedVery pleasedPleasedIndifferentUngrateful
The last time you bought chocs for someone, who were they for?
EnglishFrenchGermanBelgianSwissOther
ExtremelyVeryModeratelyIndifferentNot interested
Up to 20
21–25
26–30
31–40
41–50
Over 50
Up to £5,000
Up to £10,000
Up to £15,000
Over £15,000
Any other comments
Objectives and results of the questionnaire
The purpose of the questionnaire was:
The character of the target market can be split into two main parts:
Chantal explained:
I have decided to poll the residents in their own right by direct leafleting. There will be an incentive to reply (such as a reduction in the price of a box of chocolates). At the same time I shall be sampling the passing trade, by means of the questionnaire. Thus I expect to obtain information about these different market sectors.
The sample
The figures below represent the first 100 questionnaires. Early results bore out expectations that the Saturday afternoon shoppers on the King’s Road were made up of a large number of under-20-year-olds, groups D and E (up to £10,000 pa).
Total sample to date: 100 (50 male, 50 female).
General information drawn from the sample
Customers
Ninety per cent of this sample buy chocolate bars more than once a week. Sixty per cent bought boxes of chocolates for special occasions such as birthdays, Christmas, Easter, Mother’s Day, or for a thank-you present. Only 10 per cent said that they never bought boxed chocolate.
When asked if they had ever bought chocolate as a gift for a particular person, 86 per cent responded positively, and the categories of people for whom the gift was bought are as follows:
Table 6.2 Results of the first 100 questionnaires
|
No. |
Age |
Socio-economic grading |
||
|
30 |
up to 20 |
which |
% |
|
|
20 |
21–25 |
converts |
E up to £5,000 |
42 |
|
20 |
26–30 |
to: |
D £5,001–10,000 |
28 |
|
10 |
31–40 |
C £10,001–15,000 |
11 |
|
|
10 |
41–50 |
B £15,001–20,000 |
8 |
|
|
10 |
over 50 |
A over £20,000 |
11 |
|
|
100 |
100 |
|||
Table 6.3
|
Category |
% |
|
friends |
44 |
|
mothers |
26 |
|
relations |
15 |
|
grandparents |
8 |
|
wives |
4 |
|
lovers |
3 |
|
100 |
Price
When asked how much they had spent on the last box of chocolates bought as a gift:
Ninety-six per cent responded positively when asked if they had ever been given chocolates as a gift. Their reactions to receiving chocolates as a gift were:
Table 6.4
|
Chocolate nationality |
Preferred by% |
|
Swiss |
37 |
|
English |
25 |
|
Belgian |
16 |
|
French |
7 |
|
German |
3 |
|
US |
1 |
|
Italian |
1 |
Product
Chocolate preferred (by nationality type).
Trades and professions in the sample were widely varied, including the titles:
The diversity of favourites showed no clear pattern, and ranged through specialist Belgian fresh-cream chocolates such as Godiva and Leonidas, standard boxes like Lindt and Bendicks, to Mars bars and Double Deckers.
When asked if they thought the existing chocolates on the market were boring (and this was evidently a question that they had not considered):
An attempt was made to test the response to the ‘Rococo’ concept of fanciful product lines, without leading the respondent:
These figures show that 55 per cent responded to ‘Rococo’ positively.
When examined in terms of age groups and income brackets a pattern quickly became evident: the A/Bs showed a high degree of awareness, and an established buying pattern of high-quality chocolates. They were also interested in a shop which offered a service superior to that otherwise available.
Examination of the lower income brackets showed less awareness of available products and less readiness to spend money on them.
In the age groupings, the over-50s showed little desire to buy novelty chocolates, though the As, Bs and Cs aged 26–50 seemed to have a definite appetite for high-class, well-presented chocolates.
Of the positive respondents only 12 per cent had been offered a gift-wrapping service in the shop where they had bought the chocolate.
Summary of findings so far
The overall habits of the chocolate-buying public (which is the majority of the population) were supported by the early findings, which were that the average Briton eats 8 oz of chocolate per head/per week. I will carry a wide range of chocolate bars for everyday consumption.
It also appears that at some time in the year, most people will buy chocolate as a gift. When chocolate is purchased, in the normal way, it would not come with a gift presentation.
The awareness of certain ‘Rococo’ product lines will have to be heightened by advertising in the appropriate media; for example: Chocolate Cameras in the British Journal of Photography.
Competition
Other chocolate shops in London:
None of these shops offer the kind of service I am proposing.
Following two further Saturdays of market research, Chantal was able to tabulate the largely positive results and make successful representations to her bank for finance to lease the shop. Rococo has subsequently been a happy ‘success story’ in the King’s Road.
To get the best out of an online presence you should use your site to learn more about your customers; this will help you to tailor your offerings to their needs. You need to get information about your customers and store it in a way that allows you to use it when they visit your site again. Below are some of the ways in which you can get this user feedback.
These are small files deposited on the hard disk of anyone visiting your site. If you have cookies set up on your site, your server will be able to read visitors’ cookie files on their hard drives. The information contained in them can be related back to any information on your customer database. A cookie might contain a customer’s name, the type of computer they use, their password for accessing your site and any other routine information that would otherwise have to be re-entered every time they returned to your site.
Inviting customers to install an ‘executable program’ is another means of getting online feedback. This will allow you to get a lot more information about the user, but is seen as intrusive by most people. In all probability, fewer than one in five users will let you install such a program, but in some circumstances it may work well.
You could go a stage further and offer an intelligent internet tool such as My Web, which reacts to customers’ shopping habits and suggests different sites related to subjects or products in which they are interested. You can then monitor customers’ reactions to these suggestions and use the information to refine your own offerings in a highly sophisticated manner.
Web questionnaires can help by getting very detailed user feedback. They are similar to paper-based questionnaires, but with a few major advantages. As there are no paper or postage costs, you can ‘mail’ as many users as you like as often as you like. Questionnaire distribution and feedback can be very quick. Also, rudimentary analysis of feedback can be done automatically by inserting links between the questionnaire and some spreadsheets.
EXAMPLE Julian Talbot-Brady
Julian Talbot-Brady, Cranfield MBA and qualified architect, investigated launching ‘EU-architect.com’, an internet-based start-up company targeted at the United Kingdom’s 30,000 registered architects. The aim was to provide a ‘one-stop’, all-in-one service to meet the needs of busy architects by providing easily accessible online sources for all their information needs. He designed a questionnaire to be e-mailed directly to the top 100 architectural practices in the United Kingdom, as well as to the leading 500 construction product suppliers. He chose to use Zoomerang.com, which at the time provided a free 30-day trial. Despite an accompanying letter (offering possible equity sharing), the resulting response rate of only 12 per cent made him realize that the potential for his service was much smaller than he had anticipated, leading him to accept a post with an industry supplier to develop a similar site for its own products.
Remember, if you are storing personal data about your customers on your site, they have a right to know what is going to happen to those data. In Europe and elsewhere, there are laws on data protection with which you will have to comply.
The most common way statistics are considered is around a single figure that claims in some way to be representative of a population at large. This is usually referred to as an average. There are three principal ways of measuring an average and these are the most often confused and frequently misrepresented set of numbers in any business plan.
To analyse any information gathered from market research you first need a ‘data set’ such as that in the table below.
Table 6.5 Competitor selling prices
|
Competitors |
Selling Price £/$/€ |
|
1 |
30 |
|
2 |
40 |
|
3 |
10 |
|
4 |
15 |
|
5 |
10 |
This is the most common measure to express information and is used as a rough and ready check for many types of data. In the example above, adding up the prices: 105 and dividing by the number of competitors: 5, you arrive at a mean, or average, selling price of 21.
The median is the value occurring at the centre of a data set. Recasting the figures in the table above puts company 4’s selling price of 15 in that position, with two higher and two lower prices. The median comes into its own in situations where the outlying values in a data set are extreme, as they are in our example, where in fact most of our competitors sell for well below 21. In this case the median would be a better measure of the central tendency. You should always use the median when the distribution is skewed. You can use either the mean or the median when the population is symmetrical as they will give very similar results.
The mode is the observation in a data set appearing the most; in this example it is 10. So if we were surveying a sample of customers across the whole market we would expect more of them to say they were paying 10 for their products, though as we know the average price is 21.
As well as measuring how values cluster around a central value, to make full use of the data set we need to establish how much those values could vary. The range helps here and is calculated as the maximum figure minus the minimum figure. In the example being used here, that is: 40 10 30. This figure gives us an idea of how dispersed the data is and so how meaningful the average figure alone might be.