Market Sensing for Differentiation

Many new businesses and products fail. Far too many! They fail regularly in both the manufac­turing and service sectors. By failure we mean that the new offerings fail to excite customers and fail to reach the sales and market share goals set by the companies that develop them. Research shows that the major reason that new offerings fail is that they are too much like existing market offerings. New products which are hard to differentiate simply do not capture the customer's imagination. However, the lack of differentiable features is a symptom, not a cause. The cause of the problem is a poor understanding of customers' needs.


Research shows that product failure is a major issue. As we have said, the major cause of failure for new products and services is that they cannot be differentiated. If products are hard to differentiate, then this is due to a poor understanding of customers' needs. Unfortunately, this is a common problem. Many organizations don’t have an adequate understanding of their customers and users, few have the deeper understanding that is necessary to develop well differentiated products. Why?

The main reasons are that customers' requirements are changing fast and inadequate methods (that is, only traditional methods) of market sensing are used. Companies do not use innovative approaches to market sensing because they don’t have the resources, their organizations are unfamiliar with the new techniques, or they perceive data to be difficult to collect and analyze. Such perceptions act as a strong barrier to the adoption of new market sensing approaches.

Changing Customers and Customer Needs

The challenge of trying to understand the customer's needs is exacerbated by the fact that expectations are changing quickly in many markets and, in response, business models may need to change significantly to be profitable.

The demographics for the next 50 years show that many new and existing markets will evolve. For instance, the aging population in the West will have different needs. The size and nature of many markets will change: the demand for healthcare will rocket but, as the working population as a percentage decreases in many countries, healthcare funding will come under extreme pressure. This will necessitate a whole range of low-cost products and services.

Other markets like Southeast Asia are now largely made up of young consumers with particular aspirations and, therefore, different product needs. As the earnings in newly industrialized countries increases, the demand for particular products and services is develop­ing.

For example, the Whirlpool Corporation launched the the world's cheapest automatic washing machine, which retails at around $150 in Brazil and China. Companies that can accurately identify the needs of cus­tomers in developing markets will be at an advantage.

Appropriate products and services may be low-tech and have fewer features than their Western equivalents. In many markets, understanding the customer's needs means knowing which features of a product or service are essential, and which features only add cost and complexity but little perceived value."

If the price is right, cus­tomers can be very willing to accept compromises. Conjoint analysis is a market sensing method to understand the trade-offs that customers are willing to make between, for example, service and price (by having them consider different combinations). However, the way conjoint analysis is often applied is fundamentally flawed, in that the factors used have not been appropriately elicited from customers.

Changing customers also means that traditional market segments are frag­menting and companies will need to adjust their product ranges accordingly ­for example, car manufacturers now target over fifteen key segments in the U.S., as opposed to only five in the late 1960s. Contrast this to the market addressed by Henry Ford's products! At the same time, there are additional pressures such as consumer demand for more environmentally acceptable products and ser­vices. As customers' needs change, so should the approach we take to under­standing them. However, most organizations continue to just use surveys and focus groups.

Traditional Market Sensing

Traditional market research mainly uses surveys and focus groups. Typically, the questions to be asked are based on the knowledge of existing products, markets, and customers. In selecting a survey sample, companies strive to identify a rep­resentative group of customers or users, whose answers will be indicative of the whole market, or at least a segment. It should be noted that in some markets the customers and users may be different persons, and in addition, the purchase decision may not be made by a single person but rather by what is called the decision-making unit (DMU)- this can consist of several people. Particularly in business-to-business markets, the DMU can be complex as the decision-makers involved can have different expectations and requirements.

The main tool in the traditional market researcher's armory, the survey, has several drawbacks. Customers and users often find it difficult to articulate their needs. Asking direct questions does not help with this problem. We regularly come across questionnaires that are so poorly designed that they will not gener­ate reliable responses. The level of skill required to design an effective questionnaire is often underestimated. In addition, a major issue with questionnaires is the low response rate. How many questionnaires do you fill in and return? Not that many, probably. Companies are realizing that surveys are increasingly becoming very difficult to administer effectively and Internet-based approaches do not necessarily improve the quality of responses.

The second traditional method for market research is the focus group. Focus groups are small groups of customers or users who have sufficient knowledge to discuss a specific topic, related to a product or service. Normally, they are invited to meet at a neutral location, the discussion topic is introduced, and visual examples of the subject matter are often displayed. The discussion is stimulated with a broad question posed by the moderator, who also ensures that all participants contribute equally and also that the appropriate topics are discussed. Focus groups mix interview techniques with observation (with mar­ket researchers often being hidden behind a two-way mirror). Video record­ings may also be used. Once the data have been collected, careful analysis leads to a list of product attributes required by customers. The majority of mar­keting managers say that ideas generated by focus groups are unexciting and new products based on these ideas are purely incremental innovations (which cannot be differentiated from the competition). "Customers often describe the solutions they want in endless focus groups and surveys ... How sad it is, then, when the product or service is finally introduced-and the only reaction in the marketplace is a resounding ker-flop."

This is because there are several limitations to focus groups. The first is that discussions take place outside the customer's environment; this means that a host of clues that product design­ers can learn from are missing. Similarly, as focus group discussions are not aligned directly with a purchasing decision their validity is limited ("when a consumer reaches for a product ... this is the only time and place that consum­ers' purchase interest and motivations are well defined and readily expressed").  

Second, focus groups are by their nature not representative.

Third, the scope of discussions is limited by participants' limited knowledge of the possibili­ties for new product and service designs. Consequently, the results of focus groups lead to incremental improvements rather than the breakthroughs that management hopes for. Harvard Business School summarized the situation as "Focus groups have potentially enormous value, but not the way most com­panies use them."

Although both methods have their limitations, surveys and focus groups are still valid market research techniques, provided that they are combined with a wider set of techniques that both allow deeper insights and cross-validation of results.

The importance of new approaches to understand­ing customers is equally important in the service sector. It should be noted that "traditional market research and development approaches have proved to be particularly ill-suited to breakthrough products."