Test marketing offers the marketing company two important benefits. First, it provides an opportunity to test a product under typical market conditions in order to obtain a measure of its sales performance. As well as enabling top management to make an accurate prediction of its potential national turnover, this information often forms the basis of the decision whether to extend the product nationally. So the importance of its accuracy is self-evident.
Second, it provides an opportunity, while the product is on limited sale, for management to identify and correct any weaknesses in either the product or its marketing plan before making the commitment to a national sales launch, by which time it will normally be too late—and certainly very expensive—to incorporate product modifications and improvements.
Despite these benefits, however, the decision to test market should never be routine. It is a costly, laborious method of collecting information about reactions to new products, and therefore a test market should be used only as a last resort. The more profitable route to follow with a new product—provided the risk is acceptable and the research sufficiently reassuring—is to launch nationally and avoid the costs and delays of a test market. Test marketing enables the company to minimize losses but not to maximize profits.
There are four major factors that should be considered in determining the efficacy of test marketing:
1. It is necessary to weigh the cost and risk of product failure against the profit and probability of success. For example, at Cadbury Typhoo Limited, though we have test marketed 24 products during the past three years, during this period we have also successfully launched 4 products nationally, but without utilization of a test market phase. In each case of launching nationally, I should stress that the costs and risks of product failure were low.
2. The difference in the scale of investment involved in the test versus national launch route has an important bearing on deciding whether to test. Of the products we have launched directly into national market, very little difference in manufacturing investment was called for whether we opted for a test or national launch. On the one hand, where plant investment for a national launch is considerable, but only slight for a test market, the investment risk favors the test launch approach.
3. Another factor to be considered is the likelihood and speed with which the competition will be able to copy your product and preempt part of your national market or overseas markets, should the test be successful. Competitors will be monitoring your test market, and where they have the technology, they will be developing their own versions of your product—and marketing it if you leave the opportunity open for them to do so. Within two years of the start of Cadbury’s successful test market of a children’s chocolate line (Curly Wurly) in the United Kingdom, we have seen identical competitive versions of the product appear on Canadian, Japanese, West German, and U.S. markets.
4. Apart from the investment in plant and machinery that may be involved, every new product launch is accompanied by a substantial marketing investment that varies with the scale of the launch. New product launches call for heavy advertising and promotional expenditure; they require sales force time, attention, and effort; and they need shelf space in wholesale and retail outlets, which is sometimes obtained only at the expense of the space already given to the company’s existing products.
Moreover, if a new product fails, the costs of rebating and reclaiming unwanted stocks from customers have to be faced, along with those costs of writing off unwanted and unusable materials and packaging. Top management should also take into account the possible damage that a new product’s failure can inflict on the company: its reputation in the eyes of consumers and customers may be blemished, which is a real if not quantifiable danger.
The foregoing marketing costs—or risks—are reduced by limiting the new product launch to a test market. The cost of concentrating sales force priorities on an unsuccessful new product, and of allowing profitable existing products to lose some share of market as a result, can be greater than the more visible cost of a piece of unwanted machinery.
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Find out at When, Where, and How to Test Market by N. D. Cadbury