© 2000 John Petroff
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© 2000 John Petroff |
Market research is naturally not a finance or economics procedure, but a marketing one. It is included here in tools of the trade of a financial analyst because understanding product sales patterns and being able to anticipate changes in such patterns is the most important investigation, as argued in Chapter 9 Section A. And to do that, nothing is more informative than getting answers directly from customers.
Market research is used by management to understand customer preferences, to determine needed product modifications, to compare company product features with competitors, to formulate marketing strategy and to plan production. This intelligence gathering takes many forms: from questions asked about the purpose of a new product, to post-sale customer satisfaction reply cards. The most important tool is a survey. In order not to intimidate questioned individuals and bias their answers, surveys should be blind (i.e. no name of brand or customer) and carried out by independent agents. A full treatment of market research techniques can be found in any marketing textbook. Here, the focus will be placed on surveys that give information about sales revenue. A outside analyst may use some reduced form of expert opinion, but would almost never undertake a complete survey (except possibly in the case of company acquisition). It is the role of inside financial and marketing analysts to specify what information needs to be gathered for top management decisions. Those surveys are often made available to outside analyst, for instance in business plans submitted to loan officers.
The survey is normally conducted with the help of questionnaires. The first step is to identify what information the survey must provide and formulate questions that will generate the specific information asked. Next, sample type, size and geographic location are chosen. The sample definition, along with considerations of cost and speed, specify the best choice of mode of inquiry: mail, telephone, interview in person at home or in an outside location, interview of panel or product sampling with evaluation at company premises. Before carrying out the survey, it is always wise to test the questionnaire to see if the questionnaire is not too complex, and whether answers correspond to the intent of questions. Selection of sample comes next with an imperative to select a sample that is statistically representative, relevant in terms of targeted population, and not affected by subjective choice (i.e. otherwise answers may be biased). Gathering answers must be of sufficient volume (i.e. a direct mail reply rate of more than 20% is good, but less than 2% is indicative of a problem), and unbiased (i.e. interview takers must not lead interviewed individuals). Finally, results of the survey are tabulated and analyzed.
Companies can use a more direct market research approach by placing products for sale in test markets (i.e. in stores or through advertisement). This market test is very revealing, especially for new products, but it is time consuming and may not be representative of the entire market.
As indicated from the very beginning of this section, an outside analyst is unlikely to be directly involved in a market research project. But, because of the importance of the procedure for any company, an outside analysts must verify that the company is basing its decisions on such approach. As outlined in Chapter 9 Section G-3, it is company strategies that financial analysis is intended to judge. It is clear that the quality of strategies is predicated on assumptions which can only be formulated with the help of market research. Thus, evidence of thorough understanding of company markets by management is essential.
See review questions Q-5I.1 through Q-5I.7.
See research assignment R-5.14.
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