Market Testing

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’.

Full-market testing

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.

Roll outs

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.

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First-Mover Advantage

First-mover advantage or FMA is the advantage gained by the initial occupant of a market segment. This advantage may stem from the fact that the first entrant can gain control of resources that followers may not be able to match.  Sometimes the first mover is not able to capitalise on its advantage, leaving the opportunity for another firm to gain second-mover advantage.

FMA is the sometimes insurmountable advantage gained by the initial or “first-moving” significant occupant of a new market segment. This advantage may stem from the fact that the first entrant can gain control of resources that followers may not be able to match. Originally made apparent by the ever booming Internet phenomenon, it has recently been on the decline due to the recent economic situation. It is important to note that the first-mover advantage refers to the first significant company to move into a market, not merely the first company. In order for a company to try and become a first-mover that company needs to figure out if the overall rewards outweigh the beginning/underlying risks. Sometimes first-movers are rewarded with huge profit margins and a monopoly like status. Other times the first-mover is not able to capitalize on its advantage, leaving the opportunity for other firms to compete effectively and efficiently versus their earlier entrants. These individuals then gain a second-mover advantage.

Many new product development and marketing authors refer to ‘first mover’ advantages; the first mover being the firm that first enters the market with a new development: For those products that made it to market, an important outcome is their speed to market and the ability to achieve first mover advantage.

The first mover advantage, if managed appropriately, conveys reputational benefits where the organisation or its brand become known as the preferred or even default term for the product category – such as all personal stereos being referred to as ‘Walkman’ a brand of Sony Corporation. Apart from the ability to charge premium prices if the conditions described above are met, the firm has an opportunity to pioneer a category (or segment of one) and, if adept, build a strong market position before it is attacked by competitors.

The first mover advantage derives from the fact that it is much more difficult for subsequent entrants to dislodge an existing competitor that has established a product technology and product standards, distribution channels, a brand name and other factors that support its position. These have been quantified by comparing the 3-year cumulative performances of two beverage products, as shown in Figure 11.6. The product that was second into the market had to offer higher discounts to the channel partners in order to secure shelf space (selling-in), and spent more on consumer advertising and promotion than originally planned (selling-out). As a consequence, it only generated 20% of the profit that it expected from the product during its first three years in the market.

Industries comprised of established organisations that manufacture products with a high degree of ‘technology churn’ and product obsolescence – that is, the technology constantly evolves at a rapid rate – present a special case. The factors mentioned earlier may not always apply to them. However, first movers within a particular technology are generally able to establish and defend their market positions against later entrants until the technology ‘churns’ again.

1. Consumer-related advantages with the organisation having first choice of profitable segments and positions.

2. Advantages related to occurrence of positive network effects (ie, first mover develops effective networks before competitors enter).

3. Advantages related to the high switching costs for ‘early adopters’.

4. Cost reductions through economies of scale and experience effects.

5. Advantages related to capacity of first mover to operate with greater pricing freedom.

6. Distribution advantages by virtue of having the choice of the best distributors.

7. Advantages related to being able to set technological standards.

8. Supply-based advantages related to pre-empting competitors in securing scarce resources and suppliers.


1. Higher costs due to potentially hidden costs of accelerated NPD, such as risk of trivial innovations driving out more profitable breakthrough innovations.

2. Higher costs as a result of the required investments in early versions of technology.

3. Elevated costs due to more thorough concept and prototype testing.

4. Consumer-based disadvantages related to inability to exploit opportunities arising from shifts in consumers’ preferences and purchase criteria as the market develops.

5. Disadvantages related to being locked in on first generation technology, which prevents firms from taking advantage of the latest technology.

6. Disadvantages related to possible positioning and pricing mistakes inherent with accelerated NPD.

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