Have you seen a brand being available only in a particular town or region, and in no other place? I recently came across this, while I was travelling in North India. I found confectionary packs that were launched only in one particular region.
Why does this happen? Well these are cases when a company decides to launch particular products in a limited area in order to ‘test’ the consumer response to their offerings. This activity is popularly called ‘test marketing’.
Why companies do it
There are many reasons for this.
Maybe the company is trying to gauge how the market will react to the product and pricing before the actual launch. Or maybe it wants to assess the market share it can be garner through the product.
Or the company might also want to understand the amount of resource this product launch would require. Finally, test marketing could also be done when companies want to figure out what the trade reaction will be.
Conducting test marketing
Whatever be the objective, it is important for marketers to decide how they will go about the test market. There are many methods of test marketing.
~~ First method: Simulated test market or STM. As the name suggests, it is a simulation of the consumer’s purchase decision process — an artificial condition where consumers are given a certain amount of money and asked to choose among brands.
The awareness and distribution levels are pre-fixed and, along with the purchase parameter, determine what market share the company can expect out of this launch.
The advantage of STM is that it is resource-friendly, and various levels of awareness and distribution can be calibrated to obtain corresponding market shares. Sophisticated techniques and trained personnel are required to carry out this methodology.
~~ Second method : The other type of test marketing method is when the product is actually made available for sale at the shops, albeit in a select geography.
The choice of this geography is made after taking into consideration the anticipated trade support in that area, with localised media vehicles chosen to spread awareness. This will ensure that there is no spill-over outside the test geography.
This is important from both, a resource perspective as well as a confidentiality perspective. The benefits of this type of closed test market include getting a real-time response to the new product. However, there is always the risk of the new idea being exposed, thereby alerting competition.
~~Third method : This is an extended version of a closed test market, in that under this method, the product gets launched in at least two geographies — one that is potentially strong and the other that is potentially weak.
This is done to assess the range of market shares that can be obtained from the activity. The implementation details are similar to the closed version.
The advantage of conducting test marketing in two markets is getting an additional data point for analysis, which increases the validity of findings. The disadvantage has to do with costs and other resources. The company may have to set up production capacity and hire more manpower to carry out the activity. In case the test marketing does not go well, the resources may get wasted.
Additional aspect
One main aspect that has to be kept in mind before conducting test marketing is to define action standards — that is, what constitutes success or failure — well in advance. The metric cannot be just sales.
Other standards, such as repeat buying rate, product quality feedback, and awareness levels — can be used too. Unless these are pre-defined, any company will struggle to come to a conclusion on whether a particular product has been a success or a failure, and decisions to commercialise the new product may get delayed or be done erroneously.
Overall, it is important to note that test marketing helps estimate the future potential of a new product. Hence most companies should carry this out before the final market launch.