Pressure on market research agencies to do more for the same, or less money, has been building for some time, as media fragmentation forces advertisers to spread their budgets more thinly and extract better value from suppliers. As the effects of the credit crunch ripple through to marketing, MR agencies now face the prospect of competing for a diminishing supply of commissions.
The crux of the challenge, particularly for smaller agencies, is in a power imbalance between small, often under-capitalised, MR suppliers and multi-million pound retailers and brand owners.
As CSR qualitative research consultancy managing director, and Market Research Society spokesman, Paul Smith, sums it up: “To enter the industry all you basically need is your brain, access to a PC and a voice recorder. People jump into research because they are good at it. But they are not always so good at the nuts and bolts of running a business.”
How can MR businesses hold onto their clients in turbulent times without compromising their own profitability? To begin with, agencies with strong research skills and shaky business structures need to tackle their internal weaknesses.
As an independent qualitative specialist with a turnover of just over £3m, Smith places his own agency among the group that have most to gain from embracing financial disciplines.
“Don’t bury your head in the sand by waiting for end-of-year audited accounts,” he says. As a potential model for other small agencies to follow, Smith relates how CSR acquired management accounting skills, which allows it to monitor costs on a monthly basis and avert cashflow problems.
Companies that manage cashflow intelligently are better placed to weather market turbulence. But to pursue growth and improve profit margins over the longer term requires ambition as well as good management. One company that plans to grow profitably is business-to-business MR agency Kadence Group.
Operating on a 7% pre-tax profit margin on a £4.7m turnover, to achieve its long-term aim of a 15% margin, Kadence is building a network of offices around the world, all operating from a common data collection system, IT infrastructure and knowledge bank.
Kadence Group chief executive Simon Everard says multi-country projects tend to be less price sensitive than domestic projects. And by operating a global network Kadence can transfer knowledge gained in one market to other territories. In a knowledge-based industry, such as MR, where taking on a new client requires agencies to develop sector and business expertise very rapidly, this is a big gain.
Agencies that tackle the structural weaknesses inherent in their commercial models will be better equipped to survive downturns. But that still leaves the issue of how to keep the business ticking over without conceding margin.
Online workOne possibility is to offer lower cost research techniques. David Cole, managing director of online research company CCB FastMap, predicts that as budgets tighten, research clients will want to swap costly face-to-face methods for lower-cost online work.
He views such a development as an opportunity for online agencies like his own, but an unwelcome challenge for traditional research companies built on high-cost, people-heavy business models.
“The internet makes it possible to interview thousands of people, pre-selected by demographics, for less than the cost of a focus group. But the underlying cost structures of many traditional companies do not allow them to reduce their prices or move away from the mega-document briefing sessions which they use to justify their fees.”
Cole claims that online research linked to database profiling “gives clients more of what they want for less”. This may be so when, for example, the object of the exercise is a direct marketing campaign. But businesses often need knowledge to guide the development of new products and strategies, not intelligence for tactical purposes.
commercial realismTo market a premium MR service in a lean period, agencies need to be realistic about what is and is not achievable. Smith makes the point that market researchers can alienate long-standing clients by displaying a lack of commercial realism. “Chasing new business when a client’s own job is at risk is not conducive to a strong relationship.” Rather than pushing for business that is not there, he advises agencies to look at how research projects might be reconfigured by swapping methodologies or dropping non-essential items.
The influence that cost-cutting procurement departments increasingly play in agency selection is a further commercial reality that MR firms need to factor into their calculations. This makes it all the more important for market researchers to build strong relationships with the people who specify and actually use research in client organisations. “You need to aim to be in the position where the insight client sees you as an invaluable part of its team, rather than an expendable contractor,” says Smith. “Otherwise the default decision is that the cheaper company wins the business.”
One way to develop an inside track is for agencies to involve themselves in parts of their client’s business from which they are usually excluded.
Evo Research and Consulting chief executive Nick Johnson recommends that rather than waiting for the client to ring with a completed research brief, agencies should offer help writing the concept that the research is going to test.
“Because of our experience in brand and positioning research, we have a really good sense of what makes for clear wording and what consumers might find confusing.”
Kadence takes the principle a step further by offering established clients “research credits” that entitle them to free consultancy such as a brainstorming session to assist in new product development.
Worked out on the basis of the client’s spending, the research credit system gives the client an incentive to spend their budget with Kadence, rather than a competitor, and creates an entrée into a side of the business that market researchers rarely get to see. Everard says: “We benefit by being in on the client’s project from the very beginning, which cuts down on the amount of time we have to invest in proposal writing.”
But what if the client’s objective is not to commission new work but to extract value from work that has already been completed?
Judith Steinert, director and co-founder of the Insight Connection – a company that specialises in extracting insight from the mountains of research studies which are often to be found lying idle in organisations – advises clients to view MR as an asset base to be exploited and combined with the often forgotten about information tucked away in employees’ heads.
Steinert cites how Insight Connection uncovered learning “on the psychology of fruit” in the ice-cream division of Unilever, which proved highly relevant to the fruit and vegetable drink Knorr Vie. “Looking at what research has already been done allows you to build the bigger picture by tapping into things that you wouldn’t otherwise have known about.”
One of the ironies of the business cycle is that research budgets reduce at the very time that advertisers are most in need of imaginative insights to stimulate demand. Market researchers can respond to this by dropping prices or by engineering MR solutions that cost less to deliver.
Agencies that reduce prices indiscriminately may salvage some business, but those that offer a cost-reflective, streamlined product preserve their margins and, in the long run, make themselves more valued.