The definition and importance of market research

Market research is the process of collecting, presenting, and analysing information about the marketing and consumption of goods and services. Consumption refers to the act of buying and using products. Businesses invest in market research, even though it can be expensive, because it offers significant benefits such as better understanding of markets and improved decision-making.

Identifying and understanding customer needs

One key purpose of market research is to gather detailed insights into what customers want and prefer, helping businesses tailor their products effectively.

Key aspects of customer needs identified through market research

• Product preferences - Businesses collect information on preferences for product features, such as design, style, colour, durability (how long a product maintains its quality and function despite regular use), performance, ease of use, and storage convenience.
• Anticipating needs - Market research helps businesses anticipate customer needs, meaning they foresee upcoming shifts and make preparations, such as predicting shifts in trends, fashion, technology, or design.
• Competitive advantage - This allows companies to respond swiftly to evolving demands, ensuring products remain relevant and competitive.

Identifying gaps in the market

Market research helps businesses spot untapped opportunities—markets or resources that are available but not yet fully utilised—providing a chance to gain an edge over competitors.

Benefits and examples of finding market gaps

• Innovation opportunities - Identifying gaps allows businesses to introduce innovative products that solve unmet problems, leading to higher revenues and profits before rivals enter the space.
• Consumer solutions - Consumers frequently seek more efficient, quicker, or smarter methods for everyday tasks, creating opportunities for new solutions.

By filling these gaps, businesses can achieve a competitive advantage and generate strong initial returns.

Reducing risk through market research

Launching a new business or product carries substantial risk, especially in competitive or growing markets. Market research plays a vital role in minimising these risks by providing data to avoid costly mistakes.

How market research lowers business risks

• Early problem identification - It helps evaluate the potential success of ideas, reducing the chance of failure by highlighting issues early.
• Competitive guidance - Risks are higher when competition is intense, but research can guide adjustments to improve outcomes.

A notable example is the Amazon Fire Phone, launched in 2014 and withdrawn after roughly a year. The product failed due to factors like a saturated mobile phone market, a design overly tied to Amazon's services, and poor pricing decisions. This resulted in losses of at least US$170 million for Amazon, underscoring how inadequate market research can lead to expensive setbacks.

Informing business decisions with market research

Market research supplies managers with reliable data to make better choices, especially in areas like marketing and pricing strategies.

Role in decision-making

• Enhanced decision quality - It provides insights that enhance the quality of decisions, such as setting the right price for products to maximise revenue.
• Pricing insights - For pricing, research can reveal how changes affect sales volume and total revenue, helping businesses decide whether adjustments are worthwhile.

Formula for total revenue

$\text{Total revenue}=\text{price per unit}\times \text{quantity sold}$

Where:

• Price per unit = Selling price of each item (£)
• Quantity sold = Number of units purchased by customers

Worked example - Calculating the impact of a price change on total revenue

A business sells high-end headphones at £25 per unit, with current sales of 500,000 units. Market research shows that reducing the price to £20 would increase sales volume by 30%. Calculate the total revenue at both prices and determine if the change is beneficial.

Step 1: Identify the values

• Original price = £25
• Original quantity = 500,000 units
• New price = £20
• Increase in quantity = 30% of 500,000 = 150,000 units
• New quantity = 500,000 + 150,000 = 650,000 units

Step 2: Calculate original total revenue

$\text{Total revenue}=\pounds 25\times \mathrm{500,000}=\pounds \mathrm{12,500,000}$

Step 3: Calculate new total revenue

$\text{Total revenue}=\pounds 20\times \mathrm{650,000}=\pounds \mathrm{13,000,000}$

Step 4: Interpretation

The total revenue increases from £12,500,000 to £13,000,000, so the price reduction would be beneficial based on this research.