Inflation, Proportionality &
Justifying the Cost of Market Research
While growing up in the 60s and 70s I got an education on the effects of inflation. I distinctly remember that $20 in the late 1960s was more than enough to pay for the weekly groceries. By the early to mid-1970s it took at least $50. (I remember seeing my first $20 bill at this time.)
It wasn’t that more groceries were being bought. It was a drop in the value of the currency, and so it took more (less valuable) dollars to purchase the same amount of groceries.
According to one source, what would have cost $100 US in 1973 costs $568.08 in 2017, and what costs $100 US in 2017 would have cost $17.60 in 1973.
One of most important commodities for more than a century has been petroleum. Its importance as a strategic resource is beyond dispute. It provides a raw material which can be converted into fuel, plastics, fertilizers, pesticides and numerous other products.
By the end of 1973, the cost of a barrel of crude oil was $8.55 US. In 2017 dollars, that’s $48.63/barrel US. As July 27, 2017, the price for a barrel of crude was $48.75 and $50.97.
In other words, despite all the wild fluctuations in the price of petroleum over the past 44 years, the price for a barrel of oil today is almost the same as in 1973 – taking inflation into account.
Proportionality: (Justifying the Cost of Market Research)
One hurdle that market researchers face (whether as a buyer or seller) is justifying the cost of conducting market research. This hurdle is especially challenging among smaller companies and/or companies that have no history using market research.
This is where proportionality plays a part in justifying the cost of market research.
If a small company with $10 million in revenue should spend 0.1% on market research, this results in a budget of $10,000. I am sure that 0.1% is such a small amount that it barely registers as a cost of doing business.
If the research results in a small sales increase (e.g. $250,000), a 2.5% increase in sales or 25 times the cost of research. A $1:$25 ratio is a strong argument in favour of the cost of market research.
Now, if this same company should increase the budget to 0.2% or 0.25%, this results in a budget of $20,000 to $25,000, and one can surmise that the favourable results would more than double.
Any dollar spent on market research (regardless of the methodology used) is not so much an expense as an investment in a company’s success.
I recently conducted a large research client for a major company in which I uncovered a flaw in their product offering that was costing them significant losses both in terms of existing clients but also bids lost. As a result of the research the client was able to correct the flaw and soon began to win back and retain clients as well as win new business.
My contact at the client company made a remark about the amount of money spent on the project. This was not an expression of dissatisfaction but rather an attempt to develop an argument to justify to the stakeholders the amount spent on the research project.
My response was the following:
- Think about the 12 months before the research project and the dollar value of the clients and/or bids that were lost;
- Now think about the time frame soon after the research project was completed, and the dollar value that the market research helped your company regain by winning back lost clients as well as winning new bids;
- Compare the losses and gains (in dollars) versus the amount spent on the research project; and
- Finally, compare the amount spent against the overall revenues of the company.
When the dollar values were calculated, it showed that the amount spent was a mere 0.0009% of the value gained in sales.
Now that is value for the dollar.