Definition Test Marketing : After the concept testing and development of a new product, it is necessary to find out whether it is going to be accepted or not in the market. This is achieved through test marketing. The main objective of test marketing a new product is to reduce the commercials risk when it is brought in the market. “Test Marketing is a controlled experiment, done in a limited but carefully selected part of the market place, whose aim is to predict the sales or profit consequences either in absolute or in relative terms, of one or more proposed marketing actions. It is essentially the use of the market place as a laboratory and of a direct sales measurement which differentiates this test from other types of market research. It is clear that test marketing is essentially an exercise in experimentation, where the marketplace is a laboratory. It also brings out that the predictability of sales or profit is the objective of test marketing. Test market, in the field of business and marketing, is a geographic region or demographic group used to gauge the viability of a product or service in the mass market prior to a wide scale roll-out. The criteria used to judge the acceptability of a test market region or group includes: 1. A population that is demographically similar to the proposed target market; and 2. Relative isolation from densely populated media markets so that advertising to the test audience can be efficient and economical. USES OF TEST MARKETING There are two uses of test marketing. First it may be used as a tool for management control. Second it may also be used as a predictive tool. These two uses are discussed in some details here. TEST MARKETING AS A MANAGERIAL CONTROL TOOL Test marketing frequently serves as a pilot operation for large scale marketing activity. When a company intends to expand its business operations, some element of risk is involved. This is particularly true in respect of new products or brands where the management may be understandably apprehensive. There are for example many physical
problems such as handling of the product, breakage, storage, stocking and transportation which if not handled properly may not prove to be costly mistakes. In such cases test marketing is used to improve the mechanics of the marketing operation so that the management may know in advance the problems that are likely to arise and hence improve its marketing operations. Here the role of test marketing is limited. it is not advisable to undertake an elaborate and time consuming test marketing as this may be unnecessary. It is used as a device to gain experience to identify the problems likely to arise in marketing operations and to develop a sound marketing programme eventually. it is not used for purposes of prediction of sales or profit. TEST MARKETING AS A PREDICTIVE RESEARCH TOOL Test marketing is often used as a predictive research tool in two different situations. These are 1. The introduction of a new product/brand. 2. The evaluation of alternative marketing variables. TEST MARKETING FOR NEW PRODUCTS /BRANDS When a new product or brand is to be introduced in the market place, the management is apprehensive about its performance. This will be true particularly where the new product does not have any direct substitutes. In such a case the management neither has any information of its own nor any experience of the others. In such a situation, test marketing can be used to predict the likely performance of the new product. More often one finds that test marketing is used for a new brand of an existing product category. However a new brand may be substantially different from the others in the products category or it may be just another brand and may not be very different from the others. In the former case, some form of blind product testing is desirable to find out whether the new brand is just another addition to the product category test marketing may not be desirable. When heavy investment is required for the new brand, it may be advisable to run a test market to ensure its market acceptability first. Test marketing is also used while recycling an existing brand. When a company is seriously considering a new packaging for its product, its
repositioning or some improvement in an existing brand it may use test marketing before introducing such a change. In case of an existing brand. Test marketing should be used only when the change is substantial otherwise it will be only a wasteful expenditure. When a test market is conducted for a new product or new brand the management would like to know how this new product or new brand will do in terms of sales and profits at the national level. In this regard three approaches as suggested by gold can be used. Buying Income Method: Here the test areas sales of the new product/brand are expanded by the ratio of the national income to the test area’s income. Thus
Estimate national sales = Total income of the country * Test area sales Test Area income Sales Ratio Method: here the test area sales of the new product/brand are expanded by the ratio of national sales of other product to test area sales of this other product. Thus Estimate of national sales = National sales of other product * test area sales of test product Test area sales of this other product This other product or brand should be related to the test product in some way. Management should have sufficient evidence to think that the relationship in regard to the other product would hold well with respect to the test product. The share of the market method: Here the ratio of test area sales of new product to test area sales of the whole product category is to be multiplied by the national sales of this whole product category. Thus Estimate of national sales = test area sales of new brand * national sales of this whole product category
Practical use of test markets The test market ideally aims to duplicate 'everything' - promotion and distribution as well as `product' - on a smaller scale. The technique replicates, typically in one area, what is planned to occur in a national launch; and the results are very carefully monitored, so that they can be extrapolated to projected national results. The `area' may be any one of the following: • • • •
Television area Test town Residential neighborhood Test site
A number of decisions have to be taken about any test market: • • • •
Which test market? What is to be tested? How long a test? What success criteria?
The simple go or no-go decision, together with the related reduction of risk, is normally the main justification for the expense of test markets. At the same time, however, such test markets can be used to test specific elements of a new product's marketing mix; possibly the version of the product itself, the promotional message and media spend, the distribution channels and the price. In this case, several `matched' test markets (usually small ones) may be used, each testing different marketing mixes. Clearly, all test markets provide additional information in advance of a launch and may ensure that launch is successful: it is reported that, even at such a late stage, half the products entering test markets do not justify a subsequent national launch. However, all test markets do suffer from a number of disadvantages: 1. Replicability - Even the largest test market is not totally representative of the national market, and the smaller ones may introduce gross distortions. Test market results therefore have to be treated with reservations, in exactly the same way as other market research. 2. Effectiveness' - In many cases the major part of the investment has already been made (in development and in plant, for example) before the `product' is ready to be test marketed. Therefore, the reduction in risk may be minimal; and not worth the delays involved. 'Competitor warning'. All test markets give competitors advance warning of your intentions, and the time to react. They may even be able to go national with their own product before your own test is complete. They may also interfere with your test, by changing their promotional activities (usually by massively increasing them) to the extent that your results are meaningless.
1. Cost'- Although the main objective of test markets is to reduce the amount of investment put at risk, they may still involve significant costs.
Risk It has to be recognized that the development and launch of almost any new product or service carry a considerable element of risk. Indeed, in view of the on-going dominance of the existing brands, it has to be questioned whether the risk involved in most major launches is justifiable. In a survey of 700 consumer and industrial companies, Booz Allen Hamilton reported an average new product success rate (after launch) of 65 per cent; although it had to be noted that only 10 per cent of these were totally new products and only 20 per cent new product lines - but these two, highest risk, categories also dominated the `most successful' new product list (accounting for 60 per cent). New product development has therefore to be something of a numbers game. A large number of ideas have to be created and developed for even one to emerge. There is safety in numbers; which once more confers an advantage to the larger organizations.
Risk versus Time Most of the stages of testing, which are the key parts of the new `product' process, are designed to reduce risk; to ensure that the product or service will be a success. However, all of them take time. In some markets, such as fashion businesses for example, time is a luxury which is not available. The greatest risk here is not having the `product' available at the right time, and ahead of the competitors. These markets consequently obtain less benefit from the more sophisticated new product processes, and typically do not make use of them at all. 'When' to enter a market with a new product should, in any case, be a conscious decision. In relation to competitors there are two main alternatives: •
Pioneer - Being first into a market carries considerable risks. On the other hand, the first brand is likely to gain a major, leading and on-going, share of that market in the long term. Pioneering is often the province of the smaller organizations, on a small scale, since their investment can be that much less than that of the majors.
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Latecomer - This offers the reverse strategy. The risk is minimized since the pioneer has already demonstrated the viability of the market. On the other hand, the related reward, that of becoming the market leader, may also be missed.
To a certain extent this discussion has now long since been overtaken by events. Japanese corporations led the way in reducing development time dramatically, and even to halving it in the very mature car industry. To quote George Stalk of the Boston Consulting Group:
"The effects of this time-based advantage are devastating; quite simply, American companies are losing leadership of technology and innovation ... Unless U.S. companies reduce their product development and introduction cycles from 36-48 months to 12-18 months, Japanese manufacturers will easily out-innovate and outperform them. Accordingly, the choice to pioneer or to follow no longer exists in a number of industries. The only way for an organization even to survive may be to shorten development times below those of its competitors and for many others.
Product Replacement One form of `new product launch' which is little discussed, but is probably the most prevalent - and hence most important - of all, is that of replacement of one product by a new one; usually an `improved' version. The risk levels may be much reduced, since there is an existing user base to underwrite sales (as long as the new product doesn't alienate them - as `New Coca-Cola' did in the US and `New Persil' did in the UK). Such an introduction will be complicated by the fact that, at least for some time, there will be two forms of the product in the pipeline. Some firms may opt for a straight cut-over; one day the old product will be coming off the production line, and the next day the new product. Most will favour parallel running for a period of time, even if only because this is forced upon them by their distribution chains. This ensures that the new really does, eventually, replace the old; and it may reveal that both can run together.
Virtual Test Markets The considerable amounts of time and ressources necessary to conduct test markets, restrict the amount of test markets which can be conducted by companies. The risk to reveal a new product design too early is another concern for companies in fast moving and highly competitive markets, which is independent from any cost & time considerations. To overcome these limitations a new type of test markets, so called Virtual Test Markets, was devised. Virtual Test Markets are computer simulations of consumers, companies and the market environment. The technological basis for this kind of test market is a Multi-agent system as well as methods from Artificial Intelligence. In a Virtual Test Market, new products or marketing and distribution strategies can be tested without the risk and time constraints discussed above. Another advantage is the ability to test many different products in one Virtual Test Market as the computer simulation can always be reset to the original situation before the introduction of a new product.
Test marketing Just about everyone knows that marketers often run a test market for their new products before going on to a full-fledged launch. And just about everyone will also agree that this a good practice which can save the marketer a lot of grief. Let us look at this concept in a more formal light. Test marketing a new product is not quite the same as carrying out a phased launch. A phased launch refers to the situation where a new product / brand is first launched in one or the geographic zone or area, say only in the southern part of the country or only in the metros, or only in certain kinds of outlets, for instance. After some months, the launch would be extended to other zones or townclasses or to all kinds of outlets. This phasing out could be for the purpose of testing the waters (in which case the phased launch works much like a test market does) or it could be imposed on the marketer due to budget constraints which do not permit a wider, simultaneous launch. A test market, however, is run only for the purpose of testing the waters. Typically, the output required from a test market exercise is feedback on the following broad lines: Is our marketing mix doing enough to induce a large number of consumers to try out our product? Is our distribution strategy and implementation good enough to ensure that consumers have access to the product when they want it? Is our product performance good enough to induce the right kind of consumer to adopt the product in large numbers? Is our budgeting efficient and well-utilized? Therefore, a test market is run like a regular launch but in only the selected locations. A test market will see multi-media advertising, distribution, packaging, pricing, etc, just as if it were a full-fledged launch. The test market could run for anything from three to nine months.
Based on the results from the test market exercise, the marketer could tweak the marketing, distribution, or product mix before the nationwide launch. For a test market exercise to be successful and effective, it ideally needs the following conditions to be fulfilled: The test market location (city / town / region) should contain a good mix of all kinds of consumers, so that the feedback from the test market can be extrapolated to the national market at large. For instance, if the product being launched is cooking oil, then the test market should have a representation of consumers hailing from different parts of the country, so that the suitability of the oil for different kinds of cuisine and dishes can be assessed. The test market location should have local media facility i.e. there should be media vehicles which cover the location well but do not spill over into other locations (since – for one reason – that could make consumers in other locations go and ask for the brand only to learn that it is not available). The test market location should have its own distributor network, and should not see products spilling over into retailers in surrounding areas or nearby towns (since that kind of off-take could confuse the sales figures for the location). The test market location should have consumer and / or retail research panels that enable tracking of the product performance. And the test market location should be a relatively small and low-stakes market since it is not a good idea to do testing in a large and important market. Clearly, carrying out a test market is a useful practice. Nonetheless, it does have its drawbacks, chief among them being a long-drawn and well-run test market invariably alerts the competition to the new product launch and gives them time to formulate their response. This drawback led to the development of sophisticated
