Relevancy of Market Research in Business Markets

April 2004 Marketing

Competitive Advantages and Results from Implementing Researched Information

Market segmentation in business markets is an underutilized tool. The subject of pricing readily gets executive attention because every business wants to ensure that they get the best price for their products and services. Likewise, the subject of increasing the sales force to create more customer relationships readily gets executive attention because there is an obvious link between the size of the sales force and sales volume. But when it comes to market segmentation, most executives dismiss the subject. Pity one might say. Alternatively, we have good news for early adaptors.

Market segmentation lies at the foundation of many business thrusts, but its effect on revenue is not as direct as that attributed to changes in prices or additions to the sales force. At best, a good market segmentation study provides deeper understanding of the market. This deeper market understanding requires changes in the actions taken by sales and marketing before it can be translated into results.

Prompted by a recent report of yet another business using market segmentation to achieve significant results, this article discusses two common forms of market research that provides deeper understanding for translation into action, firmographic and psychographic research. We also examine the value of the information coming from market research with respect to its accuracy, timeliness, and relevancy. Particular focus has been placed on the relevancy of market research to drive decisions in business markets, elucidating the type of company challenge that could benefit from a market segmentation study, and clarifying the results executives should hope to achieve with this tool.

Firmographic Research

Firmographic research is focused on providing high-level descriptions of the market. This includes the industry definition, industry size, financial and business metrics, and geography. Most firmographic research can be conducted using secondary sources with a day or two of effort.

The first-order piece of market research that businesses should undertake is an estimate of the number of businesses in a given industry. The US government enumerates the companies within a given industry according to their SIC (Standard Industrial Classification) and NAIC (North American Industry Classification). Descriptions of the companies that fit a particular SIC or NAIC, along with a count of the companies within a particular industry, are publicly available. Because the government uses these codes in determining taxes, specifically FUTA, the numbers provided by the government are perhaps the most accurate that a researcher can uncover. Unfortunately, the data is only released every 5 years and, when it is released, the data is more than a year old. For this reason, it may be an untimely reflection of the past rather than an accurate depiction of the present. For industries that are neither growing nor declining rapidly, approximating the industry size by the government enumeration is a good first-order step. For other industries, the government enumeration can be adjusted proportionately to reflect changes.

Financial and business metrics include revenue, asset base, profitability, operating costs, and employee counts. Summary statistics from the Economic Census can be used to profile the average company in a given industry. For a more detailed examination, indices used by commercial banks for making loan determinations can also be used for market research purposes. From these indices, it is possible to create profiles of typical companies within an industry including balance and profit/loss statements for a company of a given size. Because the financial profiles are created from actual financial statements of different companies sorted by size, their accuracy is somewhat high. And, because the banking industry requires annual updates, the profiles constructed from these indices can be somewhat timely.

Geography refers to the physical location of the businesses. Government economic data can provide the number of businesses in any given state. Other sources, such as bu^lk-mail list compilers, can also provide the count of businesses within a given state, metropolitan area, or even zip code. The accuracy and timeliness of geographic data is dependent on the source.

Relevancy of Firmographics

Getting a firmographic description of an industry using the secondary data sources mentioned above can be accomplished at a minimal cost. The key issue is not the cost however, it is the relevancy. What can a company do with this kind of data?

The relevancy of firmographic research is usually restricted to issues of directing marketing and sales activities. For instance, executives can align their sales force to the density of potential customers in a given territory. Service oriented firms can use a simple firmographic understanding of their market to anticipate the revenue potential within a 150 mile radius of their offices. Marketing can use this data to make determinations with respect to expanding the territory served, determining which regional tradeshows are likely to have the largest overlap with their target market, or estimating the size of a campaign required to get into contact with every business within a target market.

Given the low costs associated with collecting firmographic information and the potential of this information to align sales and marketing activities with market opportunities, most businesses benefit from conducting firmographic research. The results are rarely dramatic, but the costs are so low that it is hard to argue against it even for a business that is only doing a $100,000 in revenue. Firmographic research and the executive decisions that it informs provide a first-order approximation towards optimizing a sales and marketing effort. It provides only one component of information required to direct activities, but guiding activities through firmographic information is better than no guidance at all.

Psychographic Research

Psychographic research focuses on understanding the purchasing drivers within a market. This includes the business’s orientation towards adapting new technology, creating revenues through capturing new versus servicing existing customers, or lowering costs through making employees more productive versus making assets more productive. The range of psychological issues that can be investigated is limited only by the imagination of the researcher and the relevancy of the information to driving sales.

Last fall, a speaker stated at a Chicago business roundtable that businesses should always segment according to demand. Psychographic research provides a higher level of understanding of demand than that which can be collected through firmographic research. It seeks to understand demand not as an industry wide metric, but with respect to specific customers and their needs.

The accuracy of psychographic research is limited to the biases of the research approach and the inherent statistically error. Biases in the approach can arise from the way that a question is asked, the selection of the research sample, and a host of other mechanisms. These biases can be minimized in the research design and accommodated in decision making. Statistical error is a direct result of the prohibitive cost of contacting every company within a market. Most businesses should be able to achieve acceptable results with a sample size of 50. In considering the accuracy of psychographic research, executives can contrast the objectivity of a research effort with the inherent biases associated with information coming from internal sources.

The timeliness of psychographic research is much improved over that of firmographic research conducted with secondary sources. Once the research is designed and executed, the results and analysis can usually be tendered within a few weeks.

Relevancy of Psychographic Research

Psychographic research is typically customized to the company seeking information. Companies that order psychographic research use it as a competitive advantage to understand their market better. As a competitive tool, businesses use psychographic information to customize the sale message to individual prospects and customers based upon their profile. For new customer acquisition, businesses offering a suite of products all aimed at the same target market use psychographic information to customize the sales message to focus on specific offerings with specific prospects according to their profile and likely purchasing drivers. For existing customer relationships, businesses use psychographics to determine which add-on products and services would be in higher demand and improve customer retention.

ADP Dealer Services, as noted previously in The Wiglaf Journal, went from single digit declines in revenue to double digit growth after executing psychographic market research and implementing the results in their sales process and product development processes. This is significant considering that the ADP Dealer Services line of business is approximately $700 million in revenue serving the mature market of car dealerships. (See ADP Dealer Services Succeeds in Mature Market, 28 May 2003.)

Likewise, Hill-Rom, mentioned in HBR’s March 2004 issue, reports revenue growth in health care sales from $723 million in 2001 to $787 million in 2002 achieved while cutting the sales force. Ernest Waaser, President and Chief Executive of Hill-Rom, largely attributes the growth in revenue achieved while cutting the sales force to the decisions made and processes implemented based upon the results of psychographic research. Hill-Rom primarily used the results to customize the sales message and realign their sales process and territories.

In both of the above business cases, the psychographic research was used to improve the sales process. Other sales and marketing activities, such as product development, sales territories, and promotional message were also affected.

Attributes of ADP Dealer Services and Hill-Rom that enable psychographic research to be a cost effective tool are twofold: (1) they serve a large business markets with more than 10,000 potential customers; (2) they have a number of products and services to sell to the same market. Psychographic research helped these companies by enabling them to align customer-needs with offerings more efficiently. By better aligning customer-needs to offerings, the companies were able to sell more.

As an ancillary note, both Hill-Rom and ADP Dealer Services also reported higher customer satisfaction ratings as a result.

If the key value of psychographic market research is in aligning customer-needs to offerings, the most common objection to this approach comes from the sales force and their reluctance to change their habits. Both Hill-Rom and ADP Dealer Services have alluded to the fact that the sales force had to be convinced to use the research results. Many salespeople would prefer to ignore the research results and continue to promote all products and services to all customers. This objection can easily be overcome. Psychographic research is not intended to prevent the selling of any offering to any customer; it is intended to indicate which offering is most likely to be desired by which customer. In this sense, it provides a starting point for a dialogue with customers as to where a company can best provide value, not a handcuff to prevent the achievement of results.

If both of the business cases involving psychographic research also involve businesses with over $500 million in revenue, one should ask if this approach is appropriate for smaller businesses. We believe that such an approach can be appropriate for businesses doing as little as $20 million in revenue. Consider again the costs and benefits. In 2004, targeted psychographic research projects can be conducted for as little as $40,000 to $80,000. The costs to make decisions and implement actions are non-incremental to the business because executives are charged with these activities on a continual basis. Considering that the average result of the two business cases listed is a 10% increase in revenue, a $20 million business can reasonably hope to achieve an additional $2 million in revenue. Thus the incremental costs as a proportion of incremental revenue are between 2% and 4%. This is a good investment considering that most companies report spending between 15% and 50% of top-line-revenue on sales and marketing.

Driving Results

When considering any kind of research, businesses should consider the value of the information gained from that research. The information value of any piece of market research can be examined in three dimensions: Accuracy, Timeliness, and Relevancy. The accuracy and timeliness of any researched information is dependent upon the method used to collect that information. Relevancy is dependent upon the use of that information to inform executive decisions.

Given the choice between taking action with zero information versus taking action with questionable information, most executives would prefer the questionable information while pressing for good information. Market segmentation studies are conducted explicitly to provide executives with better information than they would otherwise have. It informs executive actions in a competitively advantageous manner towards achieving results.

The business cases discussed herein highly indicate that businesses can use firmographic and psychographic information to improve the effectiveness of their sales and marketing effort and thereby increase revenue significantly, even in mature business markets. An analysis of the economics of market research indicates that small and large firms alike can utilize this tool to improve the achievement of results.

However, if all companies segmented and understood their market through targeted market research, the information would cease to be a source of competitive advantage. It would instead become a competitive entry barrier. Fortunately, the early movers to using market research and segmentation may be able to achieve significant improvements in market share therefore locking-in a first mover advantage.

About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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