Before making any significant investment, competent business managers thoroughly analyze the opportunity. They will perform a financial analysis to justify the investment. The typical analytical model employed is a discounted cash flow analysis. The two major components of this methodology are the upfront investment and the ongoing cash flow from operations. The initial investment is straightforward. It includes the outlay for land, building, furniture, fixtures, and other startup costs to be capitalized. A cash flow analysis employs the typical expenses incurred in your existing outlets. The cost of Goods Sold and Labor vary with sales. Most other expenses are fixed, at least on an annual basis.
Business activity is reflected in revenue. Revenue is the critical component of cash flow from operations. The business owner must determine the revenue required to achieve the target Return on Investment. The revenue target is the product of the number of transactions and your average transaction value. The average transaction value is revenue divided by the number of transactions. You must know your customer’s behavior to make that forecast. You must know who they are and why they visit your establishment. You must know how often they trade with you and how much they spend. You must know their demographics, i.e., their age and income level. You must know as much as you can about your customers. Detailed customer information will help you build a revenue model to complete the cash flow expectation.
Early in my career, I was the Director of Planning and analysis for the Retail Group of a Fortune 500 Conglomerate. I spent most of my time evaluating investment proposals for prospective new stores. Later in my career, I became adept at prioritizing markets for expansion. Every market, (think SMSA) is a collection of trade areas (think neighborhoods). You determine the viability of a market by researching its trade areas. Understanding the trade areas means understanding their demographics. The prioritization of potential trade areas is based on the performance of existing outlets in their trade areas.
Once you have established the revenue required to achieve your target ROI you must determine if it is reasonable. The business owner can confidently move forward if the revenue estimate is reasonable. If the revenue cannot be justified, further consideration is required. The data from one point of distribution is not enough. One needs three to five locations or more to generate reliable data.
How does one validate the revenue required to make an investment work? Forecasting the exact revenue amount is not realistic, however, one can determine a reasonable range. One obvious metric is to compare an existing location to the site under consideration. The comparable location should match the size of the trade area, accessibility to prospective customers, the number of competitors, and the number of prospective customers with the ideal demographic profile, etc. The revenue generated by the comparable existing location suggests the potential for the site under consideration. There are other ways to validate the targeted revenue, but this example is instructive.
What do you need to know about your customers?
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- Who are they? Socio-economic profile
- Where are they coming from, home, work, other
- How far do they travel? Time/distance
- How often do they trade with you?
- How much do they spend?
- Age
- Household income?
The entrepreneur must assemble the customer information required to complete their analysis. There are many sources to consider data owned by the entrepreneur. Credit Card vendors can supply some of the data, and some may be acquired by a third-party researcher at a cost.
Begin by collecting your customers’ data from your internal records. Internal records reveal average transaction value (check average), activity by day, daypart, and month. Credit card companies can provide aggregated information about consumer demographics and residence. Third-party marketing researchers can help determine the boundaries of your trade areas. They do this by plotting the customer’s home and work address. The point is to know enough to forecast the revenue potential from prospective trade areas.
Finding customer data
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- Customer Surveys
- Data shared by credit card and other 3rd party vendors
- Size of trade area by home/workplace, map their address
- Beware of destination venues for projections
SUMMARY AND CONCLUSION
The successful entrepreneur knows his customers. He continually works to understand their evolving wants and needs. This is fundamental to running a successful business. Continued success for any size business requires customer knowledge. This knowledge helps the business owner retain their customers. New products, services, and programs are based on customer insights. Without a customer insights program, the business owner is on shaky ground. Without solid customer data, significant growth of the business is not realistic.
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Jim Weber – Managing Partner, ITB Partners
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The first maxim inscribed in the forecourt of the Temple of Apollo at Delphi is “Know Thyself”. Organizations of all sizes must develop detailed strategic plans that describe their mission, goals, and objectives and define key strengths and weaknesses. A foundational marketing research study will develop a greater understanding of the marketplace dynamics and consumers to identify your unique selling proposition and better target your organization’s goals and objectives to the needs and characteristics of the marketplace.
Customer retention is critical to the success of any business. Current customers are easier to engage, cheaper to retain, more likely to spend more dollars with you, and can recommend your products and services to others. But, to retain customers, you first have to know and understand them. Marketing Research is critical to understanding how your current customers perceive and engage with your products and services. Customer experience and customer satisfaction studies conducted on a regular basis measure change in customer perceptions due to marketing programs and tactics deployed by your company and competitive activity. Regular Awareness, Attitude, and Usage research can help you further understand the needs and wants of your customers and the characteristics of their lifestyle, media consumption, and demographics that you can leverage to better meet those needs and wants.
Like a shark that must swim forward to stay alive, a business organization must grow to survive. Marketing Research is necessary to learn about the differentiating characteristics of your non-customers and your prospects. Deploy research among prospective customers to measure attitudes and usage of your competitor brands as differentiated from your customers. Additionally, a Market Segmentation study can be used to group prospects into homogenous segments that can be differentially targeted with specific marketing.
In his famous treatise, “Art of War”, Sun Tzu says, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” Having insights about your competitors can identify gaps in their product and service delivery to exploit in your tactical marketing. The starting point is to gain a relative measure of brand awareness for your company and that of your competitors. Interviews with your competitors’ customers can identify competitive brand positionings relative to your own and their strengths and weaknesses. Ultimately, your analysis should “map” or compare your brands’ strengths and position versus those of your competitors.
George Bernard Shaw is quoted, “The single biggest problem in communication is the illusion that it has taken place.” In a world overrun with messaging, how do you get your messages to stand out? Marketing Research is the vehicle to provide feedback about how successful your marketing campaigns are in building awareness and supporting your brand positioning. Attitudinal information will also help guide the development and structure of your advertising and promotional messaging to effectively break through the clutter, clearly communicate, and support the positioning and unique selling proposition of your products and services.
The features, benefits, and attributes that you use to describe and evaluate the product in research MUST match the product that you will bring to the market as closely as possible. Testing attributes that aren’t possible or too expensive may lead to unrealistic demand forecasts. For example, in testing a new online video game service, the research described the product as including hundreds of games from the top game publishers and a seamless interface and game-playing experience. Target consumer response to this concept was highly positive. However, when it was time to launch the product, many of the top game publishers were not included and the product required advanced drivers and high-powered PCs with very large RAM capacity to perform optimally. As a result, consumer expectations were never reached, and the product ultimately failed.
Qualitative Research (focus groups, depth interviews, ethnography) utilize small, non-projectable samples. Qualitative research is very effective in providing guidance, hypotheses development, and disaster prevention. However, because the samples are small and not representative of the entire target market, the detailed findings developed solely on the insights from qualitative research may be wildly different from the reality of the marketplace. Always follow up with quantitative, projectable research to confirm hypotheses!
consider using a down weighting scheme using historical empirical data to verify actual product take rates to survey results.
The most famous case illustrating this caveat is the Edsel. When developing the Ford Edsel, researchers tested various components of the car in isolation. They identified the preferred bumper, the preferred grill, the preferred dashboard configuration, and so on. When all the research was completed, they combined the top tested components together. But the car that resulted did not look or operate optimally. Utilizing one or more trade-off testing approaches such as Discrete Choice, Conjoint, or Max-Diff mentioned above will help to avoid this problem.
team so that either adjustment can be made to improve the product or that the launch can be canceled. I once conducted a pricing test for a new product that indicated that the target price that consumers were willing to pay was about $100. However, the cost to make and sell the product was about $200. Unfortunately, despite the obvious discrepancy, the client decided to launch the product at a price of $285. Suffice it to say, the product was a flop. So, not only do you need to tell the client bad news, they need to believe you and act accordingly.
Large consumer companies like Coca-Cola, Proctor & Gamble, and Frito-Lay spend millions of dollars each year on marketing research to gain an edge in a competitive market. They have a large staff of people with PhDs, MMRs, and MBAs creating and managing complex research studies to provide data and insights to support business decisions.
Is there enough time to conduct the research? Sometimes you just don’t have the time you need to conduct the research that is necessary. Early in my career, a product manager asked me to provide a proposal to research a new product innovation that was under development. It was the end of March. I was excited by the chance to build a comprehensive research program to assess the feasibility of a product, not only new to the company but a true innovation in the industry. I wrote a proposal that included secondary research, qualitative research, and a number of step-wise quantitative studies, all culminating in an estimate of demand for the new product. The whole program would take 12-15 months, which I felt was pretty efficient considering the scope. But the product manager rejected my plan, not because of the expense, but because of the timing. You see, the product under development was already scheduled to be launched on November 2 of that same year. The launch was on a published schedule at a major industry conference and the company CEO was already slated to make the announcement. So, there was no time to execute any research to support the development and launch of the product.
Are you blessed with too much time? I once rushed a research project into the field at the end of the year to make sure that we used up the money that was in our budget. It was a prudent thing to do from a budgetary standpoint, but it wasn’t effective for the business. I presented the results of the research in January of the following year, only to find that the insights were no longer relevant because the entire marketing program upon which the research was predicated was to be radically changed in the next month.
Do you need to have measurements before and after an event or campaign? If you are conducting a Pre-Post study, you must be sure that the Pre phase of the research is completed before the event that you want to measure in the Post phase begins. If you are measuring the effectiveness of an advertising campaign, the Pre phase must be completed before the ad campaign is launched. Sometimes, it’s impossible to conduct a Pre phase. For example, last April, I was asked if we could compare attitudes of people about healthcare before the beginning of the COVID-19 pandemic. At the time, without a 1985 DeLorean equipped with a Flux Capacitor, it was impossible to conduct a Pre COVID-19 survey.
Can your timing be interrupted by external forces? I was managing a packaging test for a brand of fruit juices utilizing personal interviews in three cities. We had a tight timeline to finish the research to provide input to the manufacturer to coincide with the completion of the packaging production facility. Everything was right on schedule until the interviewing facility outside of Los Angeles had to evacuate due to out-of-control wildfires. Fortunately, no one was hurt, but external forces beyond our control delayed our project by a full week.
Is this a good time to be conducting any research? There may not be a “Right” time to conduct a research project and perhaps the best decision is to delay or not do any research. For example, you shouldn’t be testing a new technology before you have a working prototype. I once tried to test a new smartphone concept in focus groups when we only had a wooden model to show respondents. They could not understand the concept at all. Delaying the research until we could better demonstrate the product led to more useful insights.
Marketing Research is Simple…
