The purposes of market research

Market research is the process of gathering and analysing information about a market, its customers and its competitors, in order to help a business make better decisions and reduce the risk of those decisions.

A customer is the person who buys and pays for a product, whereas a consumer is the person who uses or consumes it. They are often the same person, but not always — for example, a parent (the customer) may buy a toy that a child (the consumer) uses. This matters because the firm must design its marketing to persuade the customer who pays, while ensuring the product satisfies the consumer so that the customer buys again.

The first purpose is to reduce the risk of failure. By finding out whether customers actually want the product and how much they would pay, the firm can confirm demand before committing money to production. If research shows weak demand, the firm can change or cancel the product early, avoiding the cost of unsold stock.

The second purpose is to inform the marketing mix. Research reveals the customer profile and preferences, helping the firm decide on the right product features, price, place and promotion. A product designed to match what customers want is far more likely to sell successfully.

Together, these purposes replace guesswork with evidence, making a profitable launch more likely — although research reduces, rather than removes, the risk involved.

Researching the size of a market tells a firm how large the opportunity is — the total sales it could win a share of. If the market is too small to generate enough sales to cover costs, entering it would be unprofitable, so the firm may decide not to enter. A large market, by contrast, can support the sales needed for the business to succeed.

Researching growth shows whether demand is rising, stable or falling. A growing market is attractive because rising demand makes it easier to win sales without taking them directly from rivals; a declining market is risky because the firm would be fighting for a shrinking pool of customers. This helps the firm judge whether the market's prospects justify the investment.

Researching competitors shows how many rivals there are, how strong they are and what they offer. This reveals how hard it will be to win customers and where rivals are weak — gaps the new entrant could exploit to differentiate itself.

Therefore researching these three features lets a firm make an evidence-based decision about whether the market is worth entering and how to compete in it. The value of this analysis, however, depends on the data being accurate and up to date — out-of-date figures could lead the firm to a poor decision.

Market research is likely to be very important for a small business launching its first product. As a new firm it has no past sales data to rely on, so research is its main source of information about whether customers want the product, what they will pay and who its competitors are. Crucially, a small business has limited finance, so a failed launch could be fatal: research reduces this risk by confirming demand before scarce money is committed to production, and by shaping a marketing mix that fits the target customers. For a firm in this position, the cost of not researching could be the loss of the whole business.

However, there are arguments against over-relying on research. It costs money and takes time that a cash-strapped start-up may not have, delaying the launch and giving rivals a head start. Research can also be unreliable if the sample is too small or biased, or if customers say one thing in a survey but behave differently when buying — so it can give false confidence. Some successful products (especially genuinely new innovations) have launched on entrepreneurial judgement where customers could not have described what they wanted.

Judgement. On balance, market research is important for this small business precisely because it has limited finance and no past data — the criterion is the firm's ability to absorb a failed launch. With little margin for error, even modest, low-cost research (e.g. surveying potential customers locally) is worth doing to avoid a catastrophic mistake. Research is less essential where the firm has plenty of cash to experiment, or where the product is so novel that customers cannot yet judge it. For a small, cash-limited first-time launcher, though, the benefits of reducing risk clearly outweigh the cost and time involved — so research should be carried out, but kept proportionate to the firm's budget.

Market research gathers information about customers, competitors and the market so a firm can make evidence-based decisions. It is widely believed to reduce the risk of a new product failing, but the extent to which it does so depends on how the research is conducted and the type of product involved.

The case that research substantially reduces risk. Research confirms whether real demand exists before the firm commits money to production, so a weak idea can be changed or dropped early rather than launched and lost. It identifies the customer profile and what buyers will pay, allowing the firm to design a product and marketing mix that genuinely fit the market — a product that matches customer wants is far more likely to sell. It also reveals competitors and gaps in the market, helping the firm differentiate. By replacing guesswork with evidence, research clearly lowers the chance that a product fails because it was unwanted, mispriced or aimed at the wrong people.

The case that research only partly reduces risk. First, research is only as good as its data: a small or biased sample (3.2.3) and unreliable findings (3.2.4) can give false confidence and lead to the wrong decision. Second, customers often say one thing in surveys but behave differently when actually spending money, so stated intentions overstate real demand. Third, markets change between research and launch — competitors react, tastes shift, the economy moves — so even good research can be overtaken by events. Fourth, for genuinely new innovations, customers cannot describe a product they have never imagined, so research may understate the potential of breakthrough ideas. Risk is therefore reduced, never removed.

Weighing it up (criterion). How far research reduces risk depends on the quality of the research (representative sample, reliable, up-to-date data) and the type of product (an incremental improvement vs a radical innovation). High-quality research into an established type of product reduces risk a great deal; rushed, biased research, or research into a truly novel product, reduces it far less.

Judgement. Market research reduces the risk of failure to a significant but limited extent. For most new products in established markets, well-designed research that uses a representative sample and reliable data substantially lowers the risk by confirming demand and shaping the mix — but it can never eliminate risk, because samples are imperfect, customers are unpredictable and markets move. The most defensible conclusion is that research is a powerful risk-reducer, not a risk-remover: its value is greatest when the research is rigorous and the product is one customers can realistically judge, and least when the research is poor or the product is radically new. A firm should therefore use research to improve its odds, while accepting that some entrepreneurial judgement and a tolerance of residual risk are always required.