Tuesday, October 25, 2011

The Value of Market Research

My old market research professor Anand Bodapati at UCLA Anderson School of Management used to spend a lot of time warning against doing market research without understanding the goals of the project and the business decision that the research will help to answer. This emphasis counts as one of the reasons that I consider my time in Professor Bodapati's class some of the best spent hours of my academic career.

When should a company do market research? The answer to this question ought to depend on the value of the research versus the potential profitability. Many business schools teach a traditional method of evaluating this value based on Bayes' Rule, a technique that has some support and lots of criticism, some of the criticism going back thirty years or more.

What's a marketing manager to do? I say, apply a few rules of thumb if you don't have time to do the full analysis: Do market research when...
  1. ...the outcome of your business decision is truly in doubt. This rule implies avoiding market research both when the outcome is almost certain success and when the outcome is almost certain failure. See more on the "expected value of perfect information" for the reasoning behind this rule.
  2. ...the magnitude of expenditure (or the cost of failure) is at least several times that of the market research (I often use a 10x multiple). This guesstimate ensures that you spend money where you can expect the greatest return from learning. The method also preserves focus on the projects that are most important, a critical factor when you need to communicate results to the wider organization. Wide communication of market research results is, in my opinion, too often shortchanged in large companies.
  3. ...you have the possibility of really upsetting your customers by messing up. See my recent post for more on this one.
  4. ...senior executives, salespeople, or other individuals with a lot of influence start making questionable statements that could contradict reality in strategically important ways.
And why am I thinking about this topic today? My boss reminded me about #2 today...proving that even the best of Data Geeks sometimes forget their own rules in the excitement of gaining new customer intelligence.

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