Probable payoff of each option

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Attention to the probable payoff of each new product, service or other option should be considered. The greatest potential payoff, other things being equal, is the determining factor in exercising choice. We should attempt to estimate the probable payoff of each option before we specify the necessity of researching material that is relevant to that option. Past product successes or failures can give clues about what might happen.

The cost of getting information should be weighed against possible sales and profits that may result from implementing a proposed course of action. Hence, the nature and amount of marketing research to be undertaken must be strictly controlled by cost and profit considerations. In many cases the cost of research is small compared with the possible benefits to be derived from adopting a course of action. The profits associated with the introduction of new products can run into many millions of pounds whereas the cost of marketing research may be measured in thousands of pounds. However, there may be instances where marketing research is relatively costly in relation to expected benefits. In such cases, decision trees like the one in Figure 2.1, including the options of 'with' or 'without' research, can be set up to estimate the value of undertaking research.

Sometimes, for competition reasons, it may be considered undesirable to undertake research since this may provide advance warning to the competition of what the firm is intending to do. While not undertaking research is a risky strategy, it is possible that signalling one's possible intentions to competitors may be even riskier.

Figure 2.1 shows the use of a decision tree to evaluate whether it is worthwhile undertaking research. We can see at a glance (see pp. 504-05) that the expected payoff from using research is £30,000 whereas if research is not used the payoff is

New product

No research: cost £0

Research: cost £10,000

FIGURE 2.1

Value of marketing research only £20,000. This Bayesian approach to evaluating the possible value of information assumes that the same kind of decision will be made many times and that it is possible to attach subjective probabilities to the various outcomes.

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