When Market Research Turns Into Marketing

Baldwin Louie — Mon, 23 Aug 1999 15:00:00 -0700

Six interactive market-research executives gathered in a small hotel conference room near Chicago's O'Hare Airport on July 8. After a couple of hours spent talking about the progress and challenges of the fledgling industry, Rudy Nadilo, CEO of Greenfield Online, said he wanted to ask Gordon Black, the CEO of Harris Interactive, a question.

Nadilo then accused Harris of spamming people to recruit survey respondents. The exchange not only brought the meeting to an abrupt halt, but also triggered a defamation suit that Harris Interactive filed against Greenfield Online in federal court last week.

Though reluctant to comment on the specifics of the lawsuit, both CEOs agreed to talk to The Standard. "I personally have received [unsolicited e-mails from Harris] and know others who have," Nadilo says.

Black counters, "From our standpoint, it is not pleasant to be accused of something that is not true." Black won't comment on Nadilo's e-mail specifically, but says Harris knows "when and where and how every single person in our database came into our database."

Only a couple years ago Nadilo and Black were, more or less, on the same team: They were both working to convince traditional market researchers that the Net was a valid medium for conducting the consumer polls and surveys that are at the heart of much market research.

The latest numbers help to explain what all the fuss is about. Jack Honomichl, publisher of Inside Research, tracks the interactive revenues of 21 major market researchers. In 1997, the market totaled just $9.9 million in Net revenues. Now 1999 revenues are on track to reach $72.4 million. Honomichl says most of the online research has been funded by moving money from existing research techniques.

"It is a very good period right now in the research industry," says Bob Lederer, publisher of the Research Business Report. Many companies cut their research departments in the early 1990s, yet demand stayed the same or increased. Outsourcing projects to major firms has helped spur domestic growth in the $6 billion industry. "The Internet is one of the areas where there is dynamic change," says Lederer.

Information is the currency of the Internet Economy and hardly anyone has more of it than market researchers. Historically, all responses to a survey are supposed to be kept anonymous and confidential; recontacting survey participants in the hopes of selling them anything is absolutely forbidden. But as increasing numbers of traditional researchers embrace the Net, the Harris-Greenfield spat may simply be the first of many closely watched quarrels between experts about the ethics of emerging business models.

Most observers agree that the turning point came sometime early last year. As online penetration approached 25 percent of Americans, researchers began to release statistically reliable studies that suggested it might be possible to conduct surveys online and produce results representative of the U.S. population, with at least the same accuracy as those using offline research techniques.

One such study, Harris Interactive's Harris Poll Online, accurately predicted the results of 21 out of 22 election races in 1998, matching or beating the record of telephone pollsters. George Terhanian, Harris' director of Internet research, is working on perfecting new analysis techniques, such as "propensity scoring," that balance the results of online polls to that of the U.S. population. The practice has not yet become popular in market-research applications, but is common in clinical research. "Some people say there's no right way, there's no science, there's no theory. But we say there is science," says Terhanian. The Harris Poll Online will conduct monthly election polls from now until the November 2000 election.

While many major market researchers have embraced the Web, Harris has few Net allies in the public-opinion polling field. Andy Kohut, director of the Pew Research Center, says entire demographic groups are missed by Net polls. Offering an analogy, he says, "If I went down to K Street in Washington and interviewed people and adjusted the data, it wouldn't make them look like America.

"The traditional corrections that we make in survey research adjust for small imbalances, not for large groups or for people who have no chance to play the game," Kohut says. Net polling will work, he predicts, when the 30 to 40 percent Net penetration figure of today gets nearer to 80 percent.

Kohut attributes Harris' success predicting last November's elections to the fact that major issues aren't difficult to measure online. Subtle or dynamic issues are much harder. For example, Kohut says, no matter how you conduct an opinion poll about the popularity of Moammar Khadafy, the findings will be negative. "In close elections, you will be as often wrong as you are right."

Although many public-opinion pollsters doubt the Net's validity, the tried-and-true techniques that traditional researchers trust are the ones that have given them problems for years. Mail surveys take months to complete and telephone interviewing is becoming increasingly challenging.

"Telemarketers ruined the telephone-interviewing enterprise," says Fred Bove, executive VP of Net researcher Socratic Technologies. The pervasiveness of telemarketers has prompted people to feel all unexpected calls are an intrusion into their private lives. As a result, the number of people refusing to participate in phone interviews increased from 40 percent in 1988 to 46 percent in 1997. And that doesn't include folks who aren't at home or who use an answering machine to screen calls.

Offline research is equally obsessed with the concept of random sampling, which became widely accepted in the 1940s. Random sampling ensures that each person in a known universe has an equal chance of being selected. But while telephone or mail studies can draw names randomly from the telephone book and invite people to take a survey, no official list of e-mail addresses exists. Even if one did, unsolicited contact in the Net world equals spamming - hence the Harris-Greenfield suit.

While response rates to e-mail surveys were high in the early days, Bove says, "Spam is starting to do the same thing to e-mail surveys that telemarketing did to phone surveys in the 1980s."

Net researchers aim to simulate random sampling online in a variety of ways. E-commerce and content sites can intercept visitors randomly as they hit designated Web pages. Others randomly draw e-mail addresses from an opt-in database of clients.

The convenience of Web-based surveys struck Digital Marketing Services founder Dennis Gonier back in 1995. "Instead of intruding on people by dialing phone numbers and interrupting their dinner, we adopted an invitation approach."

Gonier's down-home style and industry savvy convinced America Online (dossier)'s Ted Leonisis not only to partner with DMS in 1995, but to take a 70 percent ownership in the company. "It took Ted 20 minutes to say yes," says Gonier. Then a major research firm, the MARC Group, grabbed the balance and held on until AOL bought DMS outright in June.

DMS now enjoys the exclusive ability to recruit research subjects from AOL's 18 million members to participate in studies on the Opinion Place research forum. The DMS incentive program on AOL gives survey takers credits toward their online fees or other goodies.

At first, some research clients weren't sold on the AOL idea. AOL members were often thought of as novice Web users - not typical of the Internet population, but not typical of the U.S. population, either. And rewarding people to participate in research has always raised eyebrows about whether those being surveyed were simply "professional respondents" who love responding to surveys for the free stuff. But the completion of several side-by-side online and offline studies has shown that both techniques led clients to the same business decision.

Most importantly, online research is gathered much quicker and often at a lower cost than offline research. DMS now counts not only blue-chip consumer-goods marketers like IBM (IBM), Kodak and Procter & Gamble as clients, but has also forged strategic alliances with many of the major traditional research companies, including Custom Research, Roper Starch Worldwide and the MARC Group.

"I didn't see that it was going to be in our interest to create the infrastructure that DMS had already created," says Ed Keller, president of Roper Starch Worldwide. "The combination of what they have created and where they want to go gives us the quickest way to bring a first-class capability to our research clients."

The poor response rates of phone interviewing have also driven the cost of research up dramatically. According to Beth Rounds, senior VP at CRI, "The market is demanding a cost-effective solution." The relatively low cost of using the Net to research niche markets, such as diabetics or pregnant moms, has helped keep research part of the business process. CRI increased the online portion of its projects from less than 1 percent last year to more than 5 percent this year.

For traditional data collectors, the economics of conducting research are reversed when that research is conducting online. Where the majority of costs used to be variable - interviewers only work when there are projects going - the vast majority of Net research costs are fixed. However, programming, hardware and storage expenses can run into the millions of dollars, making it difficult for established players to compete in the game. "It is a profoundly different world," says Harris' Black. "And that is, by the way, what is causing so much anguish in the traditional research world."

Despite the high fixed costs, difficulties in finding respondents in an aboveboard manner caused many major firms to recruit large Net-based panels of willing respondents to have on hand. In addition to Greenfield and Harris, major offline companies NFO and the NPD Group also have large online panels. Greenfield has been around since 1994 and now has a pool of 1.2 million individuals in 400,000 households. Nadilo says the panel is recruited through cooperative marketing arrangements with other sites; each person who joins the pool must answer a battery of questions about their personal characteristics.

Harris uses promotions with NBC, sweepstakes and banner ads, as well as a deal with Excite, to maintain and grow its 4.5 million member panel. When surfers register at an Excite site, they become part of the Harris panel, so long as they agree to receive invitations to participate in research studies.

Both techniques have their drawbacks. Nadilo asserts that Harris' "passive opt-in" process (in which registrants on Excite must uncheck a box to opt not to become part of the Harris panel) means individuals may not know they've joined a research panel. Others say the Greenfield recruiting technique of specifically inviting people to join a research panel gets a peculiar set of folks who just enjoy filling out surveys.

About one-third of the Harris panel agrees to provide their name solely for research purposes. The other two-thirds have agreed not only to help researchers, but to receive commercial messages. This is where Harris crossed over to market research's dark side: offering to sell products to folks who express an interest in, say, a new broom.

Although a vendor fulfills the order, Harris can recontact the new broom owners and find out how the product is working, test reactions to different broom ads and offer related products. "This is a new method that has largely been ignored in the past," says Harris' Black. "It is done with the informed consent on the part of the people participating."

By selling to respondents and combining a marketing database with a panel, Nadilo says he and other researchers believe Harris is violating the guidelines of the Council of American Survey Research Organizations. Sources say Greenfield Online has filed a complaint with CASRO about Harris' recruiting practices, though the organization refused to confirm they had received such a document.

Pushing the envelope even further is BizRate.com. The Venice, Calif.-based e-commerce research firm began as a sort of Better Business Bureau guide to Net merchants. An invitation to participate in a postpurchase survey by BizRate.com is now located on the "transaction-complete" page for more than 1,700 merchants on the Web. Buyers describe their purchase experience and BizRate.com posts the findings to an online guide. AOL makes all of its merchants participate in the service to keep customer satisfaction high.

The detailed reports that result from this process would make most Net researchers drool. But Farhad Mohit, CEO of BizRate.com, isn't really focused on making a splash in the research industry. Instead, Mohit hopes to morph BizRate.com into one of the first infomediaries: a trusted intermediary which guards its members' privacy while sharing purchase-intent data with vendors and doing deals between them.

"The important thing about an infomediary is that it's centered around protecting a user's privacy," says Mohit.

"The way the world works right now is that you have supply running after demand, and supply doesn't know who wants this stuff. When demand coagulates and presents itself to supply, it is much more efficient. We're creating an efficiency in the marketplace that is a win-win."

Jon Hagel III, a McKinsey principal and coauthor of Net Worth, which introduced the infomediary concept, is apprehensive about BizRate.com's chances. "It is very unlikely that one company is going to pull this off, specifically on the market-research front," says Hagel.

But BizRate.com's investors are convinced: The firm closed a $20 million second round of financing in May.

Says Hagel: "At least companies like BizRate.com start with a more balanced proposition to both customers and vendors compared to research companies that simply help vendors better market their products."

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When Market Research Turns Into Marketing