“Why should I spend USD 40,000 on research instead of hiring another salesman?” Well… how effective is your current sales force? Are they selling the right products? Are they communicating the right messages? Are targeting the right customers, etc. etc?
Demonstrating the contribution of market research to the bottom line should be an integral part of all market research proposals. However the challenge facing market research firms is the ability to put a figure on the value of research: literally how much more money will be made or saved as a result of client’s investment in research.
In 2002/3 there was considerable corporate belt tightening as a result of the economic fall out from 911 and SARS, and for some companies research was seen as a ‘nice to have’, and expenditure could only be justified on a cost benefit basis. Signing off research expenditure was sometimes down to the COO or CFO who would base decisions on expenditure on its ability to contribute to the company’s bottom line.
Today, the economic environment is much improved, but there is still pressure on market research managers and their suppliers to demonstrate the ROI of research.
Piers Lee, Managing Director of Kadence commented, “What is key to demonstrating ROI in market research is being able to show that research is not for just research itself. Instead the industry needs to demonstrate how research can be used as a tool for risk management, as well as a tool for resource planning and optimization. This can cover the management of the product development portfolio, market entry strategies, and decisions on other corporate expenditure such as media buying, staff training, and investment in client support services”.
Matthew Harrison of B2B International China said, “Through survey-based research we are able to size the market opportunity for clients, and to an extent provide some revenue predictions, all of which can feed into the client’s investment decisions. It is still quite hard to quantify the benefit of research, but firms can certainly qualify the benefits in their proposals by being very explicit in their deliverables.’
Advertising has been challenged with similar issues. To isolate the contribution of advertising to sales is difficult because advertising too is only another part of the marketing mix. Combining media consumption and retail audit data has brought the industry close, but even this cannot take into account all the relevant variables. Some claim using econometrics can do this, but such is the complexity of these models that the results are not always accessible to or accepted by the interested parties. Most brand owners use a proxy to measure ROI on advertising such as brand awareness, advertising awareness, and brand consideration.
Matthew Carr from Illuminas mentioned ‘Without the other marketing disciplines, our insight is worthless. Looking at the total marketing spend and impact on sales is a much more worthwhile and feasible exercise than attempting to measure research ROI. You can examine the weight of research in overall marketing spend and use that proportion to deduce MR’s contribution. This approach can only work when MR and other marketing disciplines are very close bedfellows.’
FMCG research can almost always guarantee a ROI. Where you have a mass market, with millions of potential customers, slight adjustments in packaging, formulation, and pricing can have a significant impact on sales.
Kevin Meyer from Opinion Research Taiwan commented “The MNC Groups are increasingly looking for demonstrable ROI in research. How to measure it though is dependent on the clients giving the research firm evidence, e.g. by linking research findings to actual market place performance. However for confidentiality reasons, clients are sometimes reluctant to provide such information to external firms.”
Kevin also noted that in the US, clients are willing to invest in sophisticated market simulation models, e.g. BASES, partly because the consequences of product failure in such large markets are that much higher. In Asia however some of the individual markets are relatively small and the risks of failure are not so great meaning that some clients are willing to go to market without too much pre-testing.
Media and customer satisfaction research are perhaps the easiest areas to demonstrate ROI for research. The cost of media campaigns and the differential costs of the various media placements is a very high consideration for clients. Simply quantifying the media consumption of the client’s target market can identify the optimum media channels, and also identify where expensive media buying would simply be a waste of money.
Regression analysis, a fairly standard analytical tool offered by most research firms, identifies the real drivers of customer satisfaction and brand preference. By linking client’s performance on the various attributes that make up customer satisfaction and brand equity, research can give very clear guidance on where client’s investment in product, client support services, and corporate communications it right or wrong. Such advice, if heeded, can have a very significant impact on the client’s bottom line. As usual, the challenge is being able to put a figure on this, but the key advantage of the research industry over pure consulting firms, is that is their advice is based on hard data and not based on pre-determined beliefs in the market.
The Risk Mitigation Tool:
Another argument for research has been in its role in Go / No Go decisions on product and market entry.
Piers Lee from Kadence stated, “The cost of research compared to the entire cost of entering a market or launching a product is relatively small. Not unlike insurance, clients should be willing to invest a proportion of their overall project investment in research to help them mitigate their risks. Research can either give them the Go / No Go decision on product launch or market entry, or the research can refine their product / strategy to reduce the probability of failure. Our market entry research proposition is a list of deliverables that will assess how big the opportunity is, where it is, who it is, how to reach them, what is the gap in the market, and how you should communicate the product benefits.”
The role of research in risk management is well documented by Dr. Robert Cooper, a world expert in the field of new product management. Dr. Cooper states that an estimated 50% of a corporation’s sales today come from new products developed in the preceding 5 years. Much like stock market portfolio managers, senior executives who optimize their R&D investments have a much better chance of winning in the long run.
The Stage Gate® model is a dynamic decision process where the list of active new products and R&D is constantly revised. Existing projects may be accelerated, killed, or de-prioritized and resources are allocated (or reallocated) accordingly. Such processes are not only important to R&D departments but also in the CEO’s office as well.
Stage 1: Scoping: a quick assessment of the technical merits of the project and market prospects
Stage 2: Building Business Case: Go / No Go decisions
Stage 3: Development: product development, manufacture, marketing launch, test plans
Stage 4: Testing & Validation: validation of entire project, product, production, customer acceptance, and economics
Stage 5: Launch: full commercialization of project
To manage risk technical, market, financial, and operational information is gathered to help drive down risk. Each Stage costs more than the preceding one resulting in incremental commitments. Research can decrease the uncertainties across each stage, meaning risks are managed effectively.
However, recent studies show that clients rarely use these decision points and have little criteria for making their decisions.
Kevin Meyer from Opinion Research Taiwan commented, “A similar scenario exists in advertising. There is a good opportunity for research to maximize the effect of advertising on their target consumers, but often there is simply not enough time or inclination to invest in research to establish whether the advertisement is going to work or not”.
What about innovation?
Notwithstanding the benefits of research in resource planning and risk mitigation, an often overlooked area of research is that of product innovation itself, i.e. the very first stage of Stage Gate®. Research could potentially ‘invent’ the real block busters products ranging from anything from I-Pods to Post It Notes. But even the most advanced qualitative research cannot guarantee to the client that the research is going to give them a lead.
Another good example of demonstrating the potential value of research is to examine the business model used by Venture Capital (VC) firms. VCs take enormous risks in backing mostly start-up operations often using untried new technology or products. Typically out of ten companies a VC backs, five are likely to be total write-offs, three will be modest successes, one will double the initial investment, and one will be a real winner returning 50 to 100 times the original investment.
Can you imagine the contribution to the bottom line if research can increase the number of Real Winners in the portfolio of ten from one to two!