Editor's note: This is the first installment of a regular column aimed at owners and managers of marketing research companies. Michael Mitrano is a principal at the Pennington, N.J., office of Transition Strategies Corporation, a management consulting firm.

Profitability is a painful topic at many research companies these days. Although some firms saw higher revenues and profits in 2001, quite a few were down from 2000. Aside from the generally bad economy and the research hiatus that followed the September 11 attacks, several segments of the research business were hit by specific problems: the decline in ad volume, a collapse in the tech sector, and consolidation in client industries. In this environment, it's easy to fixate on these outside forces and, by implication, distance company owners and managers from bad business performance.

Still, many people made a decent profit in 2001. More importantly, some companies show consistently good results over the years while others are inconsistently profitable at best. What separates the companies with strong results from those with weak ones? When I look at different firms across the industry and talk with owners and managers, I see three factors that explain most of the difference. One is extrinsic to a company: the kind of work it does. The others are intrinsic.

The kind of work you do

At a recent financial conference I attended, one investor who funds middle-market buyouts said that he likes to fund businesses that have "the wind at their back." In that sense, it's easier to have good profitability in some segments of the research business because they are favored by market conditions - at least for now. For example, all other things being equal, it's easier to have strong profitability if you do mostly continuous tracking rather than ad-hoc work. It's easier still if you have established syndicated products. Among the syndicators, you are likely to do better if you have a moderately consolidated client industry with many mid-sized players who can afford research but are willing to share it to reduce cost. It's not so easy if your target market is mostly small companies that can't afford research, or an oligopoly that won't tolerate shared data. These days, it's easier to have high profits if you're in pharmaceutical research than telecommunications.

If you're a qualitative shop, you'll likely have higher-percentage profit margins than your quantitative neighbor - but find it more difficult to scale the business up. Social research firms have low-percentage margins but can grow very big in absolute dollars. We can all think of more examples like these.

Why bring up these built-in handicaps? I have two reasons. First, you should give them serious thought when you set direction for your business. Second, once you've done this and made decisions about the markets you will serve, you shouldn't use your markets as excuses.

Two other key intrinsic factors separate profitable firms from the not-so-profitable ones: financial systems and business acumen. They go hand-in-hand.

Financial systems

I am still amazed that, as focused and sophisticated as most researchers are with quantitative survey data, many have a hard time getting a grip on quantitative financial data about their own business. Many companies that make big investments in people and software to analyze their clients' data skimp when it comes to their own business information. Some companies that do invest in financial systems end up with disconnected pieces that do not tell a story.

The kinds of financial systems that you need to manage for profitability vary with the nature of your business. Custom research companies with more than one senior person selling and directing studies need a job cost system that tracks project labor and expenses. Syndicated companies may instead track cost by product or product group. Traditional data collection businesses will be focused on production, and should have production systems that track cost per interview by project. Technology-based companies often capitalize substantial investments in intangible assets like software and databases. They need strong analytic capabilities to track the cost of building these assets and make sure that revenues cover these costs.

All companies, of course, need traditional income statements and balance sheets. Many companies with revenue below about $5 million will do these quarterly - bigger firms should have monthly profit and loss information unless they have very predictable revenue and cost streams.

What many companies lack, sadly, is something that brings all this information together. A project cost system may show that every study is making money when the company in total is losing it. A production system may show jobs coming in on budget when the call center or company overall is not. These false signals can mislead frontline people into thinking that all is well when it isn't. They will then not understand the owner's dissatisfaction with business results when everything seems OK to them.

The key here is integration. Costs and revenues must be measured the same way in your project or production systems as they are in your profit and loss statement. The sum of study information must equal the company total. If pricing assumptions depend on key data like a cost per interviewer hour or an overhead rate, you have to continuously track the actual metrics to see how close they come to your assumptions.

Business acumen

Good financial systems are very helpful in managing for profitability, but they aren't sufficient. Even more important, in my experience, is business focus. There are some very profitable businesses in this industry that have fairly basic financial information, and many companies with extensive financial data and even more extensive losses. The key is what you do with the information you have.

Owners of most profitable research companies manage them for profit. That doesn't mean they are bad researchers, or ruthless, or cheap. It does mean that the CEO or partners recognize that they are running a business first and foremost. How does this show?


  • They hold senior staff accountable for project or account profitability in a firm but fair way.
  • They accept unfavorable financial information and act on it, rather than trying to argue it away or change the metric so that unprofitable activity looks profitable.
  • They are willing to make the hard decisions to let people go who can't deliver acceptable sales or manage a study on budget. They will make the even harder decision to exit a client relationship that can't be made profitable rather than hanging on forever in hope.
  • They know what their findings and recommendations are worth to clients, and price to that value rather than looking solely at cost.
  • They believe in the value of their company's work and the fairness of its prices, and don't back down quickly when faced with price pressure.

This isn't everyone's style. Some top researchers are more comfortable with client management and study design than tough people decisions. In successful companies, those people bring in a strong financial or operational person to provide business strengths that they lack - and then stand behind him or her when push comes to shove.

One way or another, most research companies with strong profitability have someone at the top with business acumen who will demand and then act on financial information. If you don't behave in this way, can you learn to do so? If not, you should take steps to bring someone with these skills into the top management of your business.