Calculating ROI on Market Research
Measuring and maximizing the return on investment (ROI) of market research is an important goal of most organizations. Various criteria are used to justify investments. The percentage of annual return and the payback period are important considerations when deciding how much to invest in market research. Management often feels comfortable with a 30 percent annual return on soft investments such as market research because of the potentially short payback period.
Marketing professionals are increasingly concerned with measuring market research ROI effectively. One role of market research in decision-making is proving the efficacy of management’s business insights and quantitatively demonstrating the financial value of market research strategies. Accurate calculations of market research ROI should take into consideration the valuable insights that the research can provide in helping management make more informed and intelligent business decisions.
It’s vital to answer questions like these:
- What is the ROI of our advertising or promotion research?
- What is the ROI of our market research on packaging solutions?
- What is our ROI on product pricing research?
- What is our ROI on channel to market research?
Factors affecting the decision to initiate a market research project include the conditions to be analyzed, the objectives to be reached, the strategies required to obtain the desired goal, and short-term actions supporting project strategies. Every research project should have its own defined and explicit objective stating why the research is being carried out. For market research purposes, the research must lead to a marketing decision that needs to be made or to a problem that needs a solution. Effective marketing research requires that success be measurable and directly or indirectly attributable to the research.
It’s easier to measure ROI for market research tasks when the objectives are specific. For many projects, measurement doesn’t come easily, and more subjective measures based on estimates sometimes prove valuable.
The value measurement model is demonstrated by Jonathan Fletcher, managing director of Illuminas Ltd., in his article, “Can We Measure the ROI of Market Research?” A simulation is used to model demand in terms of estimated purchase volume. The sample consists of 50,000 outcomes that include unit costs and prices set at the same level for all simulations and a calculation of the total cost and revenue associated with demand level. This results in an outcome of launch or don’t launch, based on whether a given level of demand produces a profit or loss, plus a figure for the amount of the profit or loss.
In this method, three groups of simulations are conducted, and the results are compared:
- Set 1 consists of initial product demand estimates prior to conducting research. These are obtained from the client team and are based on their intuition and hunches.
- Set 2 consists of research demand estimates, based on outside research findings.
- Set 3 is for the actual outcome. It’s based on the average of the business’s estimate before research and the estimate produced by the research.
According to Fletcher, “For each simulated actual outcome, there will be a corresponding outcome estimated by the business prior to research and a corresponding outcome estimated by the research.”
With more and more research data becoming available, especially from market research surveys, market research that was previously more difficult to quantify in terms of ROI has become more measurable. At the end of the day, the bottom line is what pays the bills and your employees’ salaries. So how do you calculate ROI on the market research you’ve invested in? Contact NBRI.
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