In the world of entrepreneurship, the concepts of the business plan and market research come up all the time. Both could help raise funding for our business idea, but in practice they could be useless, if we look at business history and at the successful new entrepreneurs who use other methods that have proved more effective.
I’m not saying you shouldn’t do market research or a business plan. I’m only saying that they probably need to be done in a different, less traditional way.
When Steve Jobs said that “people don’t know what they want until you show it to them”, he was right. I’ll go further: people have no idea why they buy some products and not others. The public can be manipulated at will, and so traditional market research is not only useless but irrational.
The Pepsi Challenge
For the first time in history, in 1980, Coca-Cola found itself threatened by Pepsi, to the point where 57% of the market preferred Pepsi. Those figures showed Coca-Cola losing its leadership, which made the company very nervous and led it to make its worst decisions.
It was all down to an excellent advertising campaign by Pepsi called “the Pepsi Challenge”, built around blind taste tests: people were given both soft drinks in plain, unbranded containers and asked which one they preferred. Pepsi won.
Coca-Cola’s executives set the whole machine to work to stop the loss of market share they were witnessing. If consumers liked the taste of Pepsi better, then, Coca-Cola reasoned, they had to change the taste of Coca-Cola.
That is what led the company to create New Coke, to stop the bleeding. For the first time, Coca-Cola had altered its secret formula to change its drink.
They ran the market tests and, sure enough, New Coke beat Pepsi. The market had given the green light to Coca-Cola’s new drink, and the company’s executives celebrated their victory.
What had happened?
It seemed clear. According to the market research, consumers had said they didn’t like good old Coca-Cola. They preferred Pepsi. But now they preferred the new Coca-Cola to Pepsi. Problem solved.
See also: The perfect business plan for raising funding
Unfortunately for Coca-Cola, this was when the real trouble began. The company faced widespread discontent among its customers. There were protests all over the United States, and Coca-Cola entered its first crisis. It wasn’t long before they dropped New Coke and went back to the original Coca-Cola, renaming it Classic Coke.
Nor did the rise of Pepsi predicted by the market research ever happen.
Experts drew several conclusions from this episode, which is still used as an example in business schools today.
People can’t tell what is better or worse when you ask them to compare two options
The moment you warn someone that they’re going to try two different products, in the case of a cola they’ll look for sweetness. In a single tasting sip Pepsi wins, but if you’re going to drink Pepsi all week, the taste becomes cloying, and so people prefer Coca-Cola.
It was a good explanation, but unfortunately just as irrational as Coca-Cola’s and Pepsi’s market research.
That “official explanation” was overturned the moment the “triangle test” was carried out. This test shows that people get it wrong, just as companies do when they go out on the street to do market research.
In the triangle test there are three containers: two hold the same drink and one holds a different one. It doesn’t matter whether there are two of Coca-Cola and one of Pepsi, or two of Pepsi and one of Coca-Cola. All participants have to do now is work out which drink is different from the other two.
The result: they would have done better by guessing, because they were rarely able to work it out.
In other words, whether you drink Coca-Cola or Pepsi isn’t down to taste, even if you think it is. It’s more a matter of huge sums of money invested in marketing campaigns.
Many studies have shown that the colour of the packaging can alter the taste of a product. As you can imagine, the colour of the wrapper doesn’t change the flavour, but your eyes can change the sensation your palate perceives.
How to raise the quality of coffee without changing the coffee at all
See also: 4 pieces of advice from business leaders that contradict what we believe about entrepreneurship
Coffee sales reps often go into a café and, as a quality test, suggest to the owner that the old coffee be swapped for the new one for a morning; as each customer tries the new coffee, they’re asked whether it seemed better or worse than the old one.
In this test, with the coffee rep right there, what usually happens is that a large majority of people, regardless of the quality of the coffee, say that they did notice a different taste and, quite likely, that the new coffee is better.
But one day I ran a different test on a coffee rep. I changed nothing at all, and told the café’s regular customers: “We’ve changed our coffee, try it and tell me what you think of the new one.”
To everyone’s surprise, the customers began savouring the coffee and using phrases like “yes, this one seems to have more body” or “it’s less acidic than the old one, and it has a better texture”.
Body, texture, acidity…? They were analysing the coffee and noticing things they hadn’t noticed for years, and now, thanks to the suggestion of a change, they were perceiving the coffee they had been drinking for months or years differently. Worst of all, they were seeing something that hadn’t changed as different.
So it’s true that if you ask people, you’re lost. As Henry Ford is supposed to have said, “If I had asked people what they wanted, they would have said faster horses.”
We could go on talking about hundreds of market studies that wouldn’t have bet a cent on a business idea that turned out to be worth billions; about record labels whose experts said there was no market for a certain kind of music, which gave us the Beatles; and about an ugly chair that the market said was too ugly, but Herman Miller decided to ignore the market’s opinion and managed to launch the best-selling chair in history. What the market really meant was that the chair was different and innovative, not that it was ugly and useless.
The most useful market research and business plan
If successful new entrepreneurs have taught us anything, it’s that these days the strategy has to be “ready, fire, aim”. If you do it the traditional way, “ready, aim, aim, aim…”, you’ll rarely see the benefits of going for your idea. Because if your business idea is innovative, the market has little to say.
“You don’t need market research for your new idea; you need customers. You don’t need to ask questions; you need to make sales.”
Tim Ferriss, author of The 4-Hour Workweek, talked about this. He explained that many entrepreneurs ask acquaintances and friends whether they would buy the product they’re planning to sell. Most say yes, that it’s wonderful and brilliant.
The acid test, then, was to tell them: “As it happens, I’ve got five of them in the car. Do you want to buy one from me now?” And, as you’d expect, he got an excuse.
The perfect business plan
Once it’s clear that we shouldn’t waste time and that we need to take the plunge, the perfect business plan is to make a few test units before you start mass-producing or investing large amounts of money in your idea.
If you struggle to sell five units, you probably don’t have a business. The ideal business plan is to get your first five customers, then ten more. Then another ten, and then another twenty. If the number of new customers keeps growing, then that’s your business plan: sell more. Everything else is words on paper that rarely come true.
Affordable loss
Although it’s very tempting to think about all the rewards you’ll get if your business idea or product succeeds, the truth is that you should focus on affordable loss. Basically, that means thinking about the worst possible scenario if your idea failed. Could you cope if it happened to you? If you think you could bear it without sinking into depression, then go ahead.
Don’t wait for the perfect opportunity; start with the means you have at hand. Focus on what you know and what you can do, and look for users or customers. That is the ideal market research and business plan.
See also: The 32 rules for becoming a successful entrepreneur
Featured image: Brooklyn Museum, CC BY 3.0, via Wikimedia Commons.
