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. Your brand has to determine if it is worth it.
This ultimate guide to test markets will answer all of your questions on test markets and market research.
The article includes the following topics below. Jump right to the section you are interested in by clicking on the header!
- What are the greatest advantages of test marketing?
- What are the biggest concerns with test marketing?
- What makes a top test market city or location?
- What are some examples of market research options for test marketing?
- What are a few famous test market 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.
The idea of a test market is to measure the 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, run advertising campaigns, and makes sales predictions before the product is fully launched.
It allows for adjustments to be made to the product, service, marketing, or price before launching it on a larger scale to more customers.
With any test market, it is important to make the purchasing experience mimic the national launch.
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, you can save a lot of money by running a market research project in a test market location.
Losing out in a smaller test market is much less expensive than losing out with a national launch.
Test markets are very popular in the fast-food industry. Have you ever traveled to a new state and had access to order menu items that are not available at home?
In many cases, that brand may be testing out a new product in select locations before the national launch.
If you pay close attention to TV commercials for fast-food, you may even hear the announcer or read a disclaimer that the product is not available in all locations.
Although test markets create several major advantages for a business, organizations must be educated about the potential negatives as well.
Many of these drawbacks can be mitigated by using an experienced new product development market research company like Drive Research.
With any new product or service launch, it is important to 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.
Product managers think since the costs are so high to test the 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 the 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 campaigns.
Much of this can be scaled with larger geographies. 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?
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:
- Nashville, TN
- Cincinnati, OH
- Indianapolis, IN
- Charleston, SC
- 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.
Example 1: Field Study
A field study is 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.
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.
The problem was: 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 the sustainability of success and product improvements through the test market project.
Apparently WOW! couldn't stomach an extended timeline for test marketing.
Drive Research is a national new product development market research company in Upstate, NY. Our company works with brands from coast-to-coast.
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Source: Harvard Business Review
George is the Owner & President of Drive Research. He has consulted for hundreds of regional, national, and global organizations over the past 15 years. He is a CX certified VoC professional with a focus on innovation and new product management.
Learn more about George, here.