What does market testing do?
After products and marketing programs have been developed, they are usually tested in the marketplace. Test marketing is the limited introduction of a product and a marketing program to determine the reactions of potential customers in a market situation. Test marketing allows management to evaluate alternative strategies and to assess how well the various aspects of the marketing mix fit together.
Market testing of a product or service, and its marketing mix (price, promotion, place/distribution channels; and for a service, people, processes and physical evidence) is undertaken for three main reasons:
1. Unlike concept and product use testing, it tests the product and the market strategy concurrently.
2. It provides a measure of synergy between elements of the market mix since the product is tested with its pricing, advertising, promotion, channels used, the merchandising support it receives and other elements of the marketing mix all being exposed to the market simultaneously.
3. It provides an organisation with a more accurate basis for forecasting volume and price, thus creating a more reliable basis for projecting the likely financial performance of the product.
It follows that market testing is used for two purposes:
1. To decide whether or not the individual elements of the marketing mix need some adjustment. For example, if the product ‘oversells’ in the test, it may be decided to raise the price; if it undersells, it may be considered whether or not to increase or adjust the marketing communication strategies.
2. Ultimately, to make a decision about whether or not to proceed with the (usually expensive) launch.
Market testing, if significant in scope, also provides an opportunity for process learning. That is, for coordinating operational aspects of a largescale launch by, for example, improving coordination between sales and marketing or production and logistics.
To understand better what market testing does, it is useful to see how it relates to other major testing steps that the product has undergone previously. Concept testing will confirm or refute ‘lack of need’, whereas product use testing will indicate whether or not the product meets a specific need. Market testing will also indicate whether the marketing strategy for the product is correct or needs adjustment.
Under what conditions is market testing undertaken?
Basically costs increase and problems become harder to solve as a project progresses through the phases in the development cycle. The same principle applies with market testing.
Whether the market testing is done early or late depends on how the factors in the figure are traded off against one another. For example, if cost savings are highly important, the market testing should occur early; if it is critical that the launch be successful, it should be done later. While the above figure indicates trade-offs between market testing early or late in the cycle, a decision must be made about whether to do it at all. Market testing should constitute the last decision hurdle before launch. However, many firms don’t market test at all, or only do so when the launch costs are expected to be very high and the risks associated with the launch are perceived to be unacceptable without more evidence.
According to experienced market researcher in Procter & Gamble indicated that market testing was skipped when the following conditions: capital investmentent is small forecasts of volumes are conservative organisation knows the business well advertising is ready and successfully tested These are the likely conditions when a product is a minor line extension or modification.
The opposite of these conditions often applies with new-toworld products and, unless secrecy is important, these tend be market tested more frequently. The high cost of test marketing is not purely financial. One unavoidable problem is that test marketing exposes the new product and its marketing mix to competitors before introduction. Thus, the element of surprise is lost. Competitors can also sabotage, or ‘jam’, a testing program by introducing their own sales promotion, pricing or advertising campaign. The purpose of this is to hide or distort the normal conditions that the testing firm might expect in the market.
Different Approaches to Market Testing
Simulated test markets
These markets are described as: Advertising and other promotional material for several products, including the test product, are shown to members of the product’s target market. These people are then taken to shop at either a mock store or a real store, where their purchases are recorded. Shopper behaviour, including repeat purchasing, is monitored to assess the product’s likely performance under true market conditions.
These are more commonly used for consumer products and, because they are ordinarily undertaken as early as possible in the development effort, they are often referred to as ‘pre-market’ tests. The central idea is to secure estimates of ‘trial purchasing’ and ‘repeat purchasing’.
This involves choosing representative parts of a market in which the new product is to be launched. These typically consist of geographic areas that are sufficiently large so that the actual advertising campaign that will be used during launch can be used in the test market; eg, a city, or province.
For example, Pepsi Cola used Canada to test some new soft drinks it was planning to launch in the US; Westpac tested a number of new financial products in Newcastle, NSW prior to launching in the larger cities of Australia’s eastern seaboard. Normal distribution is used to outlets and intermediaries, normal merchandising methods are used, etc, but distribution is limited to these ‘test markets’.
Because new products are tested in real-world conditions, when the test is successful, the risks of total failure of a launch are minimised.
Test marketing allows fine-tuning of the marketing mix because it provides a wealth of real-time hard data about the market as a whole (as long as the test market is a representative sample of the wider market).
They provide basic information that may be necessary to better manage the supply chain; eg, whether storage humidity, temperature or handling conditions are such that products deteriorate during shipment. They can serve as a ‘dry-run’ for a national or international launch, and organisational problems can be highlighted and addressed.
Disadvantages: As mentioned earlier, they invariably signal the organisation’s intentions to competitors. This may be positive if a competitor reacts to a test market the way it would on, say, a national basis (ie, indicating what competitive strategies the full launch will need to account for). However, test market areas may be sabotaged by the competitor. Examples of cases where this has occurred with some well-known new products and brands in the US
They are very expensive. In the US, direct costs of test markets range from $AUD500,000 to $AUD750,000 per city, depending on the duration and other conditions of the test. The costs of a test may exceed the marketing launch budget of many new products in Australia, and therefore reduce the potential for profit, at least in the short term. In addition to direct costs, there are numerous indirect costs associated with test marketing, including product preparation, training and internal analysis of results.
They take time. It is not unusual for full test marketing programs to last for a year. They ordinarily range between six months to as much as three years in duration, depending on the purchase cycle of the product.
Claims about their value-in-use vary significantly. For example, an AC Nielsen study of 204 health and beauty aids concluded that the odds would only be 50/50 that actual sales of the new products would be within +/- 10% of test point shares.
This technique involves choosing an area that serves as an early sample – and acts as the platform for future expansion. The product is launched in one area, lessons are learned, the market mix adjusted, and so on. The product is then progressively rolled out nationally (or internationally) based on what is being learned in the sample market. Thus, the lessons from the sample inform the wider market roll-out.
The areas chosen are typically not representative of the broader population (as in the case of test markets); rather, they have some special characteristic. For example, the sample market might be particularly accessible (close by), or the organisation may want to first run the sample roll-out in an area where competition is particularly tough. An accessible area might be chosen so that information can flow quickly and at a lower cost to the decision makers; the tough competition approach may be used to test the product in worse-case conditions; ie, ‘if we can succeed here, we can succeed anywhere’.
The biggest advantage of roll outs is that they give management most of the information and data that can be obtained from a test market, but they concurrently provide the platform for a wider launch.
Market testing can be accomplished using a variety of approaches whose relevance varies with the nature of the product, its target market (eg, industrial or consumer) and the purpose of the tests (eg, to secure data about volumes vs. quality of advertising copy). The most common methods for consumer goods are:
- Pseudo sale methods: simulated test markets in which volume and share forecasts are extrapolated from trial and repeat purchase data of a sample that does not actually purchase the product.