Zaman Khan 2/6/2016

The Importance of Market Research for Small Businesses

Small businesses and startups have certain advantages and disadvantages associated with their size. They can be nimble and versatile, or lack the expertise and funding that larger companies enjoy. In exploring the importance of market research for a small business, this paper will focus on the disadvantages of being small and how to mitigate those weaknesses. Small businesses tend to have less cash on hand, less expertise, and fewer products/services in the marketplace than larger companies, which are important buffers that protect a company from error and economic downturns. These buffers can mean the difference between a slight loss in profits for a large company to catastrophic loss for a small one.

As any business expands operations, it must conduct research to mitigate some of the uncertainty inherent in doing business. With limited resources and expertise, a small business must resort to more affordable sources of data (usually lower quality), and be more adaptive and enterprising in attempts to gain information about the marketplace (asking friends or doing research themselves). Understanding the importance of market research and how to effectively conduct it is therefore an invaluable skill for small business owners.

There are a few essential components of the market that a small company must know in order to bring goods to consumers with a level of certainty and confidence. Among the many categories associated with market research, the following four are critical and deserve a deeper look:

1. Who is the Target Audience Any company must know to whom they are selling their goods or services. While this may seem

straightforward at first, new ventures do not always go as planned. For instance, a car manufacturer may plan for a specific model it produced to be used by a wide audience, such as middleclass families, but find later that a much smaller segment of the market is interested in their vehicle. Whereas a large company has a robustness to handle such a marketing mistake without suffering a debilitating loss, a small company might incur irreparable financial losses from such a miscalculation. By allocating resources to acquire vital information on their target demographic, small businesses can begin to navigate the marketplace with better certainty. An inexpensive way to do this is to study an existing brand’s goods and their success with a particular audience. If the competition is enjoying success selling to a particular segment, then the small business can compete for the same audience with a similar product. In case there are no relevant products or brands to study, a small business can conduct a focus group, administer surveys or questionnaires, and study internally available data from previous customers’ complaints or suggestions. These methods of gathering information can shed light on how different market segments feel about a product or service.

2. Where is the Target Audience Located Knowing where the customer is located is an important piece of the recipe to sell to them. The

location of customers can offer a company precious insights such as the customers’ average income, which distributors and partners to coordinate sales efforts with, and even where to spend advertising dollars. The location of customers can also mean logistical challenges, such as additional transportation costs, how longer transportation times affect the product’s shelf life, or even reveal a weak distribution and retail infrastructure. Besides the challenges, knowing the target demographics’ location can provide advantages if they are underserved or located on a robust distribution channel. Ascertaining where customers are located can be done through traditional or electronic surveys or questionnaires, or even offering special rewards for information.

3. Where to Place Advertising

Knowing how to attract the intended audience is extremely important for any business, but it is up to the small business to be innovative, cost effective, and accurate while doing so. Since different groups of customers can be reached through different mediums (traditional or electronic) and have varying disposable incomes, knowing the age, race/culture, gender, income bracket, or marital status of the target demographic can ensure maximum bang for advertising buck. These little details can have a massive impact on the media employed to advertise, or on the actual message itself. An older audience might be reached in traditional media (radio, TV, print), whereas a younger audience is more likely to be found on electronic media (phones, internet, social-media), and yet this is subject to education and income. Similarly, certain market segments can be found in particular types of stores or engaging in niche group activities. Failing to attract the intended audience’s attention can be a costly disaster for a small company.

4. How to Price the Product The correct price for a product is an important part of maintaining the balance of supply and

demand. A small company can suffer greatly from either overpricing or underpricing an item. It is important to know the breakeven dollar to price an item to start with, but the amount that customers are willing to pay for a product or service is often the driving force behind an entire industry. There are different methods and formulas to calculate the balance between price and supply/demand. The company wants to meet the consumer at the point of most profitability without compromising the demand. Priced too high, the company will lose sales volume but gain a higher margin per piece. Priced too low, the company will lose profit per piece and potentially encounter logistical or operations problems while dealing with excessive production. Unless a company’s business models aim to succeed on high-volume/low-profit production, the sweet spot between supply and demand is what should be sought.

There are a few different ways for a small business to learn about the right price for their product. A focus group is an excellent method to research what consumers think about the price of a product/service. Ask a group comprised of the ideal customer about the perceived value of a product or service and how much they would be willing to fork over to avail it. A small business can also experiment by fluctuating prices in different sales areas to see how customers respond, to find where a price increase reduces sales volume beyond the additional profit per piece can compensate. This is easier for a business with established sales in different areas, but, nearly identical customers in that area. Lastly, a cheap and fast source of information on a product’s price can come from studying the competition for similar products, features, prices, and success.

In conclusion, a small business needs to use all the resources available to it to make sure that it knows who to reach, where they are, how to catch their eye, and at what price. There are other factors that can spell disaster for a small business that cannot be calculated, such as Mother Nature or strong competition, but such is the nature of business and its appeal. Where larger companies have more wealth and experience to throw behind an endeavor than smaller ones, small businesses must be agile, efficient, and effective to avoid crippling miscalculations. Armed with the an entrepreneurial spirit, innovativeness, versatility, and the four steps to conduct effective market research, a small business can enjoy relative comfort, even confidence, while embarking on new ventures in the uncertainty that is the marketplace. Happy hunting!