Test marketing a product is exactly how it sounds. It is the process of testing the feasibility and success of a new product or service in an isolated area before unveiling the product or service through a full, national, or global launch.
Test markets offer several advantages but also several concerns to think about as a business. This comprehensive guide to test markets will answer all of your questions from greatest advantages, biggest concerns, test market locations, test market examples, and famous test marketing failures (because who doesn't like reading about New Coke and Crystal Pepsi?)
Test markets allow businesses to collect data and feedback before a full national launch of a product or service.
What are the greatest advantages of test marketing?
The idea of a test market is to measure success of a new product or service on a smaller scale before instituting a more global launch. The test market can help a company isolate sales performance, measure goals, and makes sales predictions if the product is fully launched.
With any test market, it is important to make the purchasing experience mimic the national launch. For example, the design of a product's package is a variable that will impact sales. Once you change the variable going forward after a test market, it will undoubtedly impact future sales. The same can be said for marketing, advertising, and pricing.
With this being said, test markets are an excellent way to identify and correct weaknesses early in a launch. If sales are far below expectations and customers dislike the packaging and price level, you can save a lot of money by using a test market. Losing out in a smaller test market is much less expensive than losing out with a national launch.
What are the biggest concerns with test marketing?
Although test markets create several major advantages for a business, businesses must be educated about the potential negatives as well. Many of these can be mitigated by using an experienced new product development market research company like Drive Research. To be a well-rounded consultant you must understand the pros and cons of all research options.
Concern 1: Test marketing is costly
Even though you can minimize risk and save tremendous amounts of money if your product flops, testing marketing does not come without significant costs. These costs could include things like manufacturing, shipping, marketing, distribution, and so on. Cost is one of the major reasons companies skip test marketing all together. Product managers think since the costs are so high to test market, why not spend a little extra to go in full?
Concern 2: Delays in launch allow competition to step in quicker
A test market sounds like a great idea but what if a competitor finds out and catches wind of your new product development plan? If your test market plans to run for 3-months, that gives the competition 3-months to create a product and craft a strategy on-the-fly to beat you to market for a national launch. Why risk it?
Concern 3: Test marketing minimizes risk but does not maximize profits
This ties into my previous point. Maximizing profits in the short-term would come from a successful national launch, before the competition can steal market share. Market research and test marketing absolutely minimizes risk of failure but maximizes chances of success, but this is often delayed and is a longer-term benefit.
Concern 4: Efficiency in manufacturing
If you are working with a manufacturer to produce 10,000 units for a test market, what would the volume discount look like if you were to produce 100,000 instead? The cost per unit comes down and it actually saves you money if those units were produced anyway as part of a full launch.
Concern 5: Marketing investment
Think about all the time involved in brainstorming creative, developing messaging, choosing marketing channels, setting up campaigns, and managing advertising. Much of this can be scaled with a larger geography. If you are putting all of this time in for an isolated test market effort, does it make more sense to launch it nationally anyway?
Location. Location. Location.
What makes a good test market location?
Factor 1: Demographics
When choosing a test market city, you'll want to consider several items. As you search for a microcosm city you'll want to find a market that closely resembles your target customers. Consider factors like ages, incomes, household make-ups, and household tenures. The closer you can match your target market the more accurate your test will be.
In 2016, WalletHub released a study introducing the top microcosm cities across the United States that closely match the country's demographics as a whole. This list was topped by (1) Nashville, TN, (2) Cincinnati, OH, (3) Indianapolis, IN, (4) Charleston, SC and (5) Jacksonville, FL. The study included the examination of over 26 different variables to find the city that most closely matched the nation as a whole.
Factor 2: Media isolation
Isolating media in one market is very important when it comes to test marketing. New York City does not make a good fit for test markets because their television stations span across the Tri-State area of New York, New Jersey, and Connecticut. With overlap in markets and media coverage it is difficult to pinpoint a base for sales or market share.
Factor 3: Affordability
Choosing a smaller city or smaller market for your test market can save your budget. Exploring a test market in areas like Los Angeles or New York City would get extremely pricey when it comes to running television ads, radio ads, or billboards. However, running this same campaign in a test market like Syracuse, Buffalo, Rochester, or Albany would prove much more affordable.
What are some examples of market research options for test marketing?
Example 1: Field Study
A field study is a live testing of products or services in the consumer market. This would be Company ABC placing products on the shelves in select stores in the target market. After a period of time they would measure sales and perhaps conduct a pre-survey and post-survey before the fielding to understand buyer habits and motivations.
Example 2: Focus Groups
Although unscientific, focus groups are a great pre-test market study. They can present marketing and advertising concepts to the intended target market customers and get reactions. The focus groups can also test reactions to the new product or service itself. This type of market research helps set the table for the full test market launch.
Example 3: In-home Usage Tests (iHUTs)
This is another common form of market research. Not familiar with iHUTs as a form of market research? Read more about it here. In summary, targeted customers are recruited to test a product in their natural environment (e.g. at home). Then they are sent post-trial surveys about the product, recall of advertisements, and claimed frequency of use.
What are a few famous test market failures?
Failure 1: New Coke
Test market taste tests gone wrong.Coca-Cola tried to upgrade their classic formula to create a sweeter tasting cola. When asking test market participants to take a sip, they loved it. Problem is, Coca-Cola launched the product based on this feedback and then quickly realized sales dropped immediately. The cola was so sweet, one sip was good, but customers couldn't stomach the whole can. Very similar to the story as to why Pepsi wins taste tests but Coca-Cola wins in market share. This market research should have extended further and possibly included some iHUTs where customers would drink the entire can(s) of the beverage.
Failure 2: Crystal Pepsi
Pepsi didn't escape failure either. When Pepsi launched Crystal Pepsi, a clear soda, sales in its test market took off. Soda was flying off the shelves. After the product was launched nationally, Pepsi quickly found out, it was a product customers wanted to try once, but didn't need to try twice. Another misread test marketing project gone wrong. Again, the company misread the data and did not extend the test market to understand repeated purchases.
Example 3: WOW! Potato Chips
Not to pick on PepsiCo, but in the late 1990s they launched a healthier snack and one that carried significantly less fat and calories than the regular potato chip. Unfortunately the WOW! chips had unpleasant effects on many after the product launched nationally causing indigestion and even hospitalization. After the fall-out, the brand cleverly relabeled the WOW! chips as "Light" and removed any mention of the olestra product included. Similar to the issue with Crystal Pepsi, it is important to understand sustainability of success and product improvements through the test market project. Apparently WOW! couldn't stomach an extended timeline for test marketing.
Interested in new product development market research?
Drive Research is a new product development market research company in Upstate, NY. Questions or comments about your next market research study? Contact us at firstname.lastname@example.org or call us at 315.303.2040.
Source: Harvard Business Review