Market research >> Introduction to market research

Understanding market metrics

Core market metric for measuring markets Markets are measured in many ways, from simple sales volumes to more complex measures like market penetration, price elasticity or brand equity. Understanding the standard market measures and using the right measurements allows businesses to plan and evaluate the success of business strategies over time to evaluate the success of marketing campaigns, market strength and to identify competitive threats. Knowing what to measure and how to measure it is central to quantitative research, and terms can be easily confused.

Market metrics are used in business planning and marketing monitoring to keep the marketing programme on track. It all very well spending millions on advertising, but how do you know that the advertising is doing it's job or that there's even a market out there? The most common market metrics that companies use are:

Companies will use these types of measures in combination with specific studies, quantitative and qualitative, looking at positioning, new product development, competitive threats, advertising design, pricing and overall market strategy. In addition they will often use a range of statistical methods to link these measures together.

Market size

Market size is the number or value of units sold to a market in a given period (normally a year). Estimating market size can be difficult. Approaches include surveying manufacturers (which may lead to problems of overstatement), surveying the channel/distribution route (which may lead to problems of double counting and missing parts of the market), or surveys of end-users (most expensive as it requires a good survey).

By taking market size (units and revenue) and dividing by the number of customers you can get estimates of basket size - how much each customer in the market is worth.

Market share

Market share is the number or value of units sold in a given period for a manufacturer as a percentage of the total market size. It can be defined either as share of units sold or share of revenue.

If the market size is known a company can infer its own market share based on its own sales data.

It is possible to estimate share of revenue using published accounts, but some care has to be taken as manufacturers sale price is far lower than the end-retail price and different businesses may have different channel costs. It is also unusual for accounts to have disaggregated figures that would make share analysis possible (see market intelligence).

Market penetration

Market penetration which is the number of customers you have as a percentage of the total customers in the market. This can be on the basis of sales in a period (sales penetration) or installed base. Combining penetration with market share you can calculate sales per customer. If you have a large customer penetration, but a low market share, then you are making many low-value sales and one way to increase share is to increase the value of the sales, rather than chase more customers.

Sales penetration divided by installed penetration gives your level of customer activity. You can also use this to assess customer loyalty - the percentage of customers who stick to your brand, and brand repertoire - the number of brands bought per customer. By considering individual customers you can also look at share of wallet - how much of total business is coming your way.

If you look at sales per individual (from database sales figures or a research survey), you often see a pareto effect - 80% of the sales comes from 20% of the customers. In business to business markets, this can be even more extreme than 80/20.

Installed base (or parc)

The installed base is the number of units that exist in the market including historical and secondhand purchases. In technology markets, products rarely exist in isolation. The installed base adds inertia to a market and requires thought about compatibility and manageability. For example, if UK schools have an installed base of 1 million computers, but annual sales are only 100,000 the replacement rate is approximately 10 years (the installed based divided by the market size). In this circumstance, backwards compatibility may be as important as pure functionality.

Installed bases also affect the timing at which new products and technologies should be introduced. The take up of video-editing for instance will depend on the pricing of video cameras, the availability of powerful computers, the ease with which the video-editing software works. Understanding infrastructure and infrastructure changes can be crucial as to forecasting the timing with which new products will take off.

In considering installed base, other factors such as level of knowledge, training and skill may also be important constraining factors in product take up.

Product usage

Product or brand usage measures the frequency and weight of use of a product. A straightforward method of segmenting a market is to look at weight of purchase, separating heavy purchasers from light purchasers. By looking for differences between these two groups it can be possible to find mechanisms to increase usage across the market as a whole, or to develop specific strategies aimed at the most valuable customers.

Product usage can also look at time of day, recency and and circumstances of use. The amount a product is used or bought, combined with market penetration and market size can be converted into market volume, and adding information about prices paid, converted into market size in terms of revenue.

Customer attitudes

Usage and attitudes often go together. This is often particularly important for advertising research. One effect of changing or improving communication is to affect attitudes and understanding (it is a moot point as to whether changes in behaviour leads to changes in attitudes or vice versa).

Most attitudinal research uses banks of attitude statements (like "There should be more for young people to do in the evening") and asks people to agree or disagree. Combined with factor and cluster analysis, this can lead to an attitudinal segmentation of a market. The key to attitudinal research is to find attitudes that relate to weight of use.

Brand awareness

The percentage of customers in a market able to name your brand. May be spontaneous or prompted. Popular brands would only be measured spontaneously, lesser known brands would be measured prompted.

Can be cross-analysed with market penetration to assess depth of brand coverage and brand reach - the potential for the brand to win new customers. Also used with Brand Equity to establish the value of the brand.

Advertising awareness

The percentage of customers in a market who claim to have seen your advertising. May be spontaneous or prompted awareness. There is often a halo effect from the brand for prompted awareness so it may be higher than reality. Sometimes check questions are included.

Because of the importance of measuring advertising awareness, advertising may be designed to use test and control areas. One with advertising, one without in order that the research really measures changes caused by the advert.

Combining advertising awareness with market sales data you can estimate the "sale uplift" caused by the advertising and consequently the advertising cost per additional sale.

An additional measure is media impact - where the advertising was seen or which element of the campaign was seen. It is common for people to misappropriate advertising - many people think the only ads they remember are on television.

Brand image

Brand image is the associations between a brand and image based statements (eg "Is a brand for older people"). This is typically a bank of specific statements that the brand is rated against sometimes in comparison to other brands. The "brand image" is the pattern of scores across the image bank. Effective advertising normally centres on trying to move or improve a particular facet of brand image (Skoda is a famous example).

Strong brands have clear patterns of association. Weaker brands are less clearly defined. By counting the associations made we can measure Image Strength (the percentage of all people making an association between a brand and a statement) and Image Character (the percentage of those making an association making the association positively). Niche brands may have a strong Image character, but weak Image Strength.

Brand image can be combined with sales penetration and brand awareness to attempt to understand what the key brand association are that drive sales.

Customer satisfaction and Net Promoter Score

Customer satisfaction measures well you are delivering the product/service that you provide. Not normally part of market metrics as it relates purely to your customers. Some companies do try and measure satisfaction of non-customers relying purely on brand image, but technically this is a different measure as it is perception, rather than reality based. Nonetheless, customer satisfaction can be considered competitively, to see how your service and performance compares to that of your rivals. Many companies now use Net Promoter (NPS) as an overall measure of satisfaction.

By comparing satisfaction to brand usage, you can start to investigate customer loyalty and retention. In practice there are a number of philosophical questions with regard to how customer satisfaction is carried out and where the results are most useful See our section on customer satisfaction for more details.

For any markets, the key is knowing what to measure and how to measure it, and then using the measurements to track performance and marketing effectiveness. Robust measurements require appropriate sampling and research design, and can combine with other measures to triangulate the key numbers needed for investment and market planning.

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