Market Research should be about informing a decision maker with
information that will help her or him make a better decision.
Say we have a decision to make and right now, before we do any
research, the chance is 50% that it will succeed and bring in $5000.
There is a 50% chance that it will not succeed and it will bring in
$0. In both cases, I propose that it was $1500 to do the venture.
So we have the following options
1. Do not execute the project: Expense: 0 Return: 0; Net: 0
2. Execute the project: Expense: 1500 Return: 50% * 5000 + 50% * 0 =
2500; Expected Net : 2500-1500= 1000
In this simple case, the wise manager would choose to execute the
project and expects to net $1000.
We can introduce Marketing research as having two different effects.
In case 1, we imagine that the research improves the product so that
the odds of success are higher. For alternative 2, we might posit
that our guess at 50/50 was wrong, but in fact the marketing research
gives us a more exact estimate of the chance of success.
Developing case 1. Say the marketing research is $200, and that it
improves the chance of success for the project by 40% (relatively),
from 50% to 70%. So our options are
1. Do not execute the project: From above: 0
2. Execute the project w/o MR: from above Net: $1000
3. Execute the project w/MR: Expense: 1500 + 200; Return: 70%*5000 +
30%* 0= 3500; Expected Net: 3500 ? 1700= $1800.
If we do not have constraints, then option 3 is superior in expected
profits. Marketing Research pays off and would be worth another $800
over what you paid. The ROI would be $800/$200 = 400%
Developing case 2, let?s say the marketing research is $200, but that
there is a 50% chance of 20% success for the product and a 50% chance
of 80% success for the product. Revenue is the same as above. The MR
will tell us which success probability we will have.
1. Do not execute the project: Net 0
2. Execute w/o MR: 50%*[20% * 5000 + 80% * 0] + 50% [80% *5000 + 20%
* 0] = 2500 ? 1500 = $1000
3. Execute w MR: Here we have to do a little more work
a. If we learn 80% chance of success then 80% * 5000 + 20% * 0 ? 1000
? 300 = 4000 -1700 = 2300 (50% chance)
b. if we learn 20% success then 20% * 5000 + 80% * 0 ? 1000 -300 =
-50. But 1000-1500-200 = -700. So we would expect to lose money if
we knew that we were on the 20% success step. In fact, what we would
do is stop after we get the marketing research when we are down only
-200, and this is 50% of the time
c. Combining a and b: 50% chance of 2300 + 50% chance of -200 = 1050.
In this case, the marketing research gives us an option to stop the
project before we go into negative territory. This option is worth
$50, so we would pay an additional $50 to gather the marketing
research. Here the ROI is $50/200= 25%.
You can then directly apply this to your situation. |
