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Market research and analytics must be used not to endlessly annoy customers but to drive sales, margins and EBITDA

According to the 2017 AMA Gold Top 50 Report, the top 50 U.S.-based market research firms exceeded $11.5 billion in revenue in 2016. Market research activities cover customer surveys, social media monitoring, CRM, transaction monitoring, analytics and data visualization through dashboards. Each of these is a costly endeavor. Yet, executives wonder: Do market research and analytics really improve sales, margins and EBITDA? The answer is yes, in three different ways.

1. Market Research Directly Increases Sales

Market research often takes the form of customer satisfaction surveys, which indicate how satisfied customers are with a brand’s value proposition. But do they boost sales? Or, do they just annoy customers? The answer is both. Customers like satisfaction surveys but only if the surveys are conducted infrequently.

A 2017 study of 7,513 customers of a large North American automotive dealership examined the financial benefits of customer satisfaction surveys. Two findings stood out: First, customers who completed a satisfaction survey purchased more than those who did not, even after accounting for the satisfaction rating. On average, sales per visit were $12.18 greater among those who filled out the satisfaction survey. With an average of seven visits per customer, this amounts to roughly $85 per customer. Even if a relatively high average cost of $10 per customer is assumed for the survey, there is a 750% return on the survey investment. For B-to-B companies, the return should be even higher given the dollar volume of sales per customer.

Second, the purchase amount decreased as the frequency of surveys increased. Too many surveys cause survey fatigue and irritate customers. Transactional surveys that try to measure Net Promoter Score after every transaction backfire. Companies should measure cumulative satisfaction as part of a larger tracking study that is done no more than twice a year.

A customer satisfaction study signals and reminds customers that you care, motivating customers who complete a survey to purchase more. Over-surveying customers irritates them and decreases their purchase amount. Cumulative satisfaction, measured once or twice a year as part of a systematic tracking study should be a company’s gold standard. Especially in B-to-B contexts, companies should reduce the use of transactional and ad hoc customer surveys, instead focusing on benchmarked satisfaction surveys. The latter can increase sales directly and indirectly.

2. Investments in Analytics Increase ROI, Sales and Profitability

Marketing analytics use customer and market data along with statistical models to aid decision-making. Some argue that analytics slow down decision-making through analysis paralysis. Others cite the experience of companies such as Rhenania, a medium-sized German mail order company that expanded its customer base by 55% and quadrupled sales using marketing analytics.

A 2013 study of 212 executives from Fortune 1,000 firms addresses this issue. Executives rated analytics deployment in their company on a scale from one to seven, and the authors linked their ratings to return on assets using stock market data. A one-point improvement in analytics deployment was associated with an 8% increase in return on assets, or a $70 million increase in net income for the average Fortune 1,000 firm. This benefit of analytics deployment was stronger in companies where top management supported analytics deployment through hiring analytically skilled employees, investing in IT and creating a culture supportive of analytics.

Marketing analytics improve return on assets, net income and profitability. Executives must transform their traditional strategic planning processes to incorporate analytics through personnel and cultural changes. Housing analytics in the strategic planning function can provide the necessary boost to analytics deployment.

3. Market Research Increases Firm Value

Companies invest millions in strategic initiatives, even as they lack a systematic approach to quantifying the bottom-line benefits of the initiatives. It’s no wonder companies continue with failed initiatives when their negative effects on margins and EBITDA cannot be documented. On the other hand, a failure to quantify the positive impact of successful initiatives leads to their discontinuance. Both hurt the bottom line. Market research can eliminate guesswork and focus resources on successful initiatives.

Take the experience of a large bank (500-plus branches) that started a customer service initiative designed to reduce wait time at branch tellers. Was the initiative successful? Did it contribute to profitability? If yes, by how much? How much did the initiative add to the bank’s valuation?

To answer these questions, a marketing analytics group created a randomized field study with 200 branches implementing the initiative, and the remaining served as a control group. The idea was that reducing wait time should manifest as increased overall customer satisfaction. A statistical model that linked branch-level customer satisfaction to branch-level revenue metrics (deposits, loan volume) and margins was developed. The model showed that a one-unit improvement in customer satisfaction generated 1.2% improvement in EBITDA and increased net profit by $83 million after accounting for the cost of the initiative. Over time, the research-based model became an informational asset for the bank. Branch managers used the model to forecast their loan and deposit volume. Executives used the model to predict EBITDA and profitability based on customer satisfaction ratings. A financial simulator was developed to help with budgeting.

The research-based model became a key informational asset that was embedded in the strategic planning process. Over time, the bank grew at a 30% faster rate than its competitors. Executives attributed the growth to their ability to strategically use the research-based model to focus on successful initiatives while pulling the plug on unprofitable initiatives. This simultaneously increased revenues while decreasing expenses. The outcome: improved valuation for the bank’s stock.

By using research-based models, companies can create a rigorous and objective basis for identifying successful initiatives. The research-based model requires linking customer survey information to financial data in a statistically valid and rigorous manner to evaluate the return on a specific initiative. Over time, this can increase firm valuation as a direct result of information—market research.

Market Research: Intellectual, Structural and Cultural Changes

Market research and analytics should no longer be viewed as information-providing functions. Rather, they are strategic planning assets. Smart companies use market research and analytics as a blueprint for linking information about products, customers and markets to financial metrics like sales, margin and EBITDA.

Market research must be reconceived—intellectually, structurally and culturally. Intellectually, executives need to demand that market research become a research-based approach for linking customer and market information to financial metrics that CEOs and boards care about—sales, margins and EBITDA.

Structurally, organizations need to elevate and integrate the market research group in the strategic planning function. In one organization, marketing research and analytics reported to marketing communications. The CEO made a structural change, housing the function with the strategy and planning group, charging them to create a financial tracking system for the different initiatives.

Culturally, executives should stop engaging in speculative and wishful thinking. (I “feel” that branding adds value; we “believe” Net Promoter Score increases sales.) They need to make and demand research-based statements such as “our research-based model shows increasing satisfaction by one point increases sales by $20 million and EBITDA by $1.8 million.” These shifts can take the emotion, confirmation bias and infighting out of the decision-making process and give market research and analytics their rightful place in an organization.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at the Jones Graduate School of Business at Rice Univeristy. 

This article first appeared American Marketing Association's Marketing News as 3 Ways Market Research Drives Revenue.