Understanding the Consumer

Why Firms Research the Market

Market research: collecting and analysing information about customers, competitors and the market a business sells in.

It answers two questions. How much: how many people might buy, and at what price, so a firm can quantify likely demand before it spends money. Why: what customers value and how they choose, which gives insight into consumer behaviour.

Primary and Secondary Research

Primary research: new information collected first-hand by the business, for its own purpose. It is also called field research.

Methods include surveys, interviews, focus groups and test marketing, where a product is sold in one area before a full launch. Primary data is up to date, fits the firm's exact question and is not available to rivals, but it is often slow and expensive to collect.

Secondary research: using information that has already been collected by someone else, or for another purpose. It is also called desk research.

Sources include the Office for National Statistics (ONS), published market reports, competitors' websites and the firm's own sales records. Secondary data is quick and cheap, but it may be out of date, may not answer the firm's exact question, and rivals can read it too.

Quantitative and Qualitative Data

Quantitative data: information that can be counted or measured, such as how many people would buy a product or how much they would pay. It is used to estimate demand and sales.

Qualitative data: information about opinions, feelings and reasons, such as why customers prefer one brand to another. It explains behaviour but is hard to turn into numbers.

Both kinds of data can come from primary or secondary research, so there are four combinations. Here they are for a firm thinking of opening a gym:

Limitations of Market Research

Sample: the group of people who take part in the research, chosen to stand for the whole market. A firm cannot ask everyone, so it asks a sample and assumes the rest think the same.

Sample size. The smaller the sample, the more likely it is that the results are down to chance. Asking ten people tells a firm very little, while asking 1,000 gives results it can rely on more, but costs far more and takes longer.

Bias: anything that makes research results lean one way, so they no longer give a true picture of the market. It can creep in at several points:

• Who is asked. Surveying only a firm's social media followers misses everyone who has never heard of it.
• How the question is worded. "Wouldn't you love a gym on your doorstep?" pushes people towards yes.
• What people say. Respondents often give the answer they think is wanted, and saying you would buy something is not the same as buying it.
• Who reads the results. An owner keen on the idea may pay most attention to the answers that support it.

Even good research goes out of date as tastes change, and it cannot predict what rivals will do next.

Market Segmentation

Market segmentation: dividing a market into groups of customers who share similar characteristics and needs, so a firm can target one or more of them.

The usual ways to divide a market are:

• Demographic: age, gender or family size. Holiday firms sell different trips to families with young children and to the over-60s.
• Geographic: where people live, from region to country or town versus countryside.
• Income: how much customers can spend. Supermarkets run value, standard and premium ranges side by side.
• Lifestyle: interests, values and habits, such as people who cycle to work or choose vegan food.

Segmenting lets a firm design products, prices and adverts for the people most likely to buy, so less marketing money is wasted. It can also show up a gap, a group no rival is serving, which may be a niche market (see 1.3.4). The risk is that targeting one segment closely can put off customers outside it.