Monday, January 02, 2006

Learning about Market Research

I am beginning to realize the importance of market research. I’ve never really understood marketing, or selling for that matter. I’m a techie at heart. But I’m trying to understand every aspect of business in general, today, for my own education.

Market research is when you have a good idea for a product, and test it on a s mallish set of live customers to see their response, especially if you have multiple styles/types/colors/patterns/choices, and test to see how people receive them. You get data back about which models or colors they like the best, etc.

Let’s say you have a great idea, and want to implement it and sell it. But that’s not enough, what if people won’t buy it, or don’t like it. The more successful you are at shipping product to many stores quickly, the more danger you might be in, if you don’t have a product that will sell well. You cannot predict exactly what people will accept, only the people themselves can give you that knowledge - through market research.

Some great ideas will never fly. For example, my idea of making solid gold coins with imprints of video game characters, like Mario, Luigi, Donkey Kong, Sonic, etc. I thought it would be cool. But now I realize NOBODY would buy that. Here’s why. It turns out the class of people who like those arcade games is completely separate from the class of people who understand gold investing and coin collecting. Sure there is probably a little overlap, but in general, arcade gamers are years old, and collectors (who have the money to spend on gold coins because they have a steady good paying job!) are generally years old.

Suppose you create a cool new toothbrush design, and the plastics company says it will be easy to manufacture. You can even do the math, and realize you’ll make a lot of money from this, if it will only sell. That’s the question – will it sell? And at what price will you make the most money? If you price it too high, few people will buy it, and you lose money. If you price it too low, too close to what it costs to manufacture ship, you don’t make any money either. There’s actually a “sweet spot” in between, for any product, you just have to find it.

The best thing you can do with a product like a new style of toothbrush is generate a variety of patterns and see which ones people prefer. Pick only those with strong response, and throw away the rest. Then find out what prices people would pay for them. I’m not sure how you do that, maybe put them in a “test market”, i.e .1 or 2 stores, at a certain price, and different stores at a different price, etc. But now, for that to be a reasonable test, you have to know your customers. All those stores must be in the same general neighborhoods (or have similar types of customers). You have to get a feel for what would happen if you raise the price $.50 each, lower it that much, etc. Find the perfect “knee in the curve” for maximum profit.

It’s not just for maximum profit however. The customers will be more comfortable if they see a reasonable price on your item – reasonable from their point of view. If the price is too high, not only will fewer people buy it, but the ones who do will more likely be irritated when it turns out to be a plain old toothbrush – “for that price, I thought it would be electric or something!” You’ll get complaints, and unhappy customers. It’s not worth creating extra conflict for people who already have enough difficulties in their lives.

Your products need to genuinely help people, at a reasonable price, to benefit both you and them as much as possible. This can best be achieved through proper market research.

If you’re going to do all the work and overcome all the obstacles to make and sell a product, shouldn’t you get as much money as possible from that effort? Market Research enables you to fit this product more perfectly to your customers, making it as successful as possible, at a fair price for the customer.

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