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Marketing Case Study

For confidentiality purposes, the name of this company has been withheld. In this report, it will be referred to as Tester Tech, Inc. (TTI).

Tester Tech, Inc. (TTI) has been in business for five years, and in that time has established a strong position in the computer/video game industry as an outsource provider of game testing services. Before being released to market, video and computer games (just like any software) undergoes rigorous quality assurance and testing to ensure that it operates correctly. Many game makers are in the practice of outsourcing this testing process to companies that specialize in the critical, yet often exacting and repetitive, work of running tests. As one of these outsource test firms, TTI employs game testers who will put a game "through its paces" to find and fix any "bugs" (malfunctions) in the software, or fix compatibility issues with different hardware and video platforms.

Additionally, the company provides localization and technical communication services. Localization involves translating games into multiple languages for worldwide release, while also adjusting cultural references to appeal to local markets (e.g., instead of a hamburger restaurant on a street corner in the American version of a game, the restaurant will be changed to a curry stand for the game's release in India, where beef is not commonly consumed). Technical communications services provided by TTI include creating user manuals and online help files for game players.

TTI's customers include some of the leading video game companies in the world, including Electronic Arts (maker of blockbuster games like Madden NFL) and Microsoft Xbox. However, the console game testing market, which has been TTI's primary focus, is relatively flat. TTI is planning to expand into two new testing market segments: online games and mobile games. Additionally, the company is considering expanding its testing capabilities beyond games and into the general software test market. TTI wants to launch into these new market segments to expand its customer base and grow business. Currently, annual revenues are approximately $20 million ($17.7 million for the testing services, and roughly $2.3 million for localization/translation services).

Growth targets for the next 3 years are:

Increase existing business line revenues in console game testing and localization by 5% per year, to $21 million by end of FY 2011, $22.5 million in FY2012, and $23.1 million in FY2013. (Note that the Fiscal Year ends March 31, so April 2, 2010 -- March 31, 2011 is FY 2011)

Capture $2 million in additional revenues from a successful launch into a new market segment in FY2011, $5 million in FY2012, and $8 million in FY2013.

Current Market Situation (Situation Analysis)

Industry Background: The video game industry is divided into a number of segments based on type of platform, type of game, and type of player. The platform segmentation is primarily relevant to TTI. There are three major platforms for interactive entertainment (DFC Intelligence, p.8):

1)

Personal computers, i.e., PCs and Macs. Personal computer games include both packaged games that can be purchased and loaded onto a system for individual play, as well as online games, where the player accesses the game from a website via live internet connection.

2)

TV-based video game console systems, e.g., Sony Playstation, Nintendo Wii, and Microsoft Xbox. The customer purchases a console and then hooks it up to a TV or other monitor to play.

3)

Portable systems: PDAs and mobile phones that offer multiple uses (telephone, internet access) as well as ability to play games. Portable systems also include devices made specifically for games.

Industry Roles: There are a number of players in the game development and production value chain. The entertainment games market comprises platform makers, publishers, and developers. The platform makers include Sony, Nintendo, and Microsoft, as well as the makers of mobile phones, and other hardware on which games are played. Console platform makers create some of the game titles developed for their consoles; others are published by independent publishers who pay royalties to the console makers. Developers create games from scratch. Publishers manage the release and marketing of those games; many publishers also do development, or own or partner with development studios that feed the publisher's release slate. (DFC Intelligence, 2004, pp. 9-14).

TTI's Customers: The market dynamics for computer and video game testing serves closely parallels the video game market itself, as new platforms and new game releases drive the need for testing services. However, game testing service revenues are not tied to game sales revenues, per se; testing is a pre-release cost for the game companies, regardless of whether a game sells 100,000 copies or 10 million copies. The publisher typically pays for testing and certification in the PC and console markets, where games are growing larger and more complex. In the mobile market, where games are simpler and less complex than console/PC games, the developer typically pays for testing. (DFC Intelligence, pp. 34-38). Within developer and publisher firms, the individuals (decision makers) most likely to engage an outsource testing firm such as TTI include: QA Directors/Managers, Product Managers, Test Managers, Development Directors/Managers, and Production Directors/Managers.

Market Outlook: The console video game market remains solid with continued growth in sales revenues for both console hardware and console games. Console game sales are projected to grow at a healthy 6.9% per year through 2010 (PriceWaterhouse Coopers, 2008). However this growth comes largely from existing consoles and existing games titles. There are no new major console releases on the market that would drive a surge in new game development and testing activity, so the market prospects for TTI in that segment appear secure, but flat.

At the same time, there is rapid growth in both the online gaming segment and mobile games segment, areas where TTI traditionally has not been as dominant. Online games range from simple, single-player arcade-style games to MMOGs (massively multiplayer online games) linking thousands of players across the globe in real time in the same virtual "world." The online gaming market is growing rapidly. Online games are predicted to see an annual growth rate of 16.9% per year through 2012 (PriceWaterhouse Coopers, 2008), but may even be exceeding those predictions, for example, "[o]nline gaming sites attracted 87 million U.S. visitors in May 2009, up 22% year-on-year." (Ivan, 2009).

Likewise the mobile game market (encompassing games played on cell phones and on handheld PDAs like the iPhone and Blackberry, as well as handheld game devices like Nintendo's GameBoy) is experiencing strong growth, particularly in overseas markets due to the ubiquity of cell phones and PDA devices in both westernized and developing nations. The mobile game market is projected to reach $18 billion by 2014 (Crook, 2009).

Game testing is just one segment of the larger software testing service industry, which includes all types of packaged software programs and enterprise software for both consumer and business use. The software testing industry as a whole represents a rapidly growing market, projected to reach $56 billion by 2013, despite the global economic crisis, growing at a rate of 9.5% per year (Hertzlich, 2008).

Services: TTI offers the following services to meet the needs of its video game company customers, allowing them, essentially, to hand off a "raw" game to TTI, and then have all of the testing and quality assurance, translation, compatibility and other adjustments made to have the game be "market ready." This places TTI at a critical juncture in the video game value chain, between the game development process and the point at which the game can actually be released and sold. TTI's services include:

Game Software Testing

Game Hardware Testing

Localization & Technical Communications

Game play

Functionality

Load/stress

Compliance (TCR/TRC, Lot Check)

Porting

Compatibility

Video Testing

Regionalization

Integration testing

Peripherals & Devices

Engineering Support

Translation

Localization

Globalization

Documentation

FAQ and Online Help

Competition: Many of the other game testing companies in the market are privately held, like TTI, thus their revenue and other information is unavailable. Nevertheless, based on a speculative set of assumptions, best guesses, and publicly available information from press releases and business databases, it is estimated that the total outsource game testing market currently stands at roughly $124 million annually. With $17.7 million in revenues, that gives TTI an estimated 14.3% market share, making it one of the larger players in the industry, we believe. Some of the leading competitors include:

Absolute Quality (a division of Vincity AQ). With revenues of $23.5 million, Absolute Quality positions themselves as testing specialists, with a games-focused practice area, but a broader industry clientele. Their services in games include testing, localization and gamer technical support. They have created and trademarked a proprietary testing tool "Bug City" which helps reinforce their image as experts in the testing field. (www.aqinc.com)

Babel Media is based in the UK, with $11 million in annual revenue. They have positioned themselves as a full-service game services specialist firm. In addition to game QA, testing and localization, they also offer multi-media services including animation and voice-over talent recording. They are a leader in mobile game testing, are J2ME (Java) certified. They also claim to have worked on more than 1,400 mobile applications. (www.babelmedia.com)

Beta Breakers is a relatively new entrant into the market but has achieved $7.7 million in revenues. Their focus is games and multi-media testing, but they seem to be focused primarily on PC and Mac games (not console), as well as peripheral device testing. Their rapid growth could be attributable to a dedicated focus on this particular niche of the market, where they appear to have made significant headway. (www.betabreakers.com)

Game Instinct (a division of Testing 1-2-3) is a game-industry specific division of larger software testing firm Testing 1-2-3. Game instinct has revenues of $2.25 million. Their services tend more towards the hardware side of the business with a focus on TCR checks/compatibility testing, localization testing, black box/crash testing. But they also do standard functionality testing, playability testing, localization testing, and offer beta administration services (helping a company run its customer beta test process). They have a location in India for low cost testing labor. (www.gameinstinct.com)

Veritest (a division of Lionbridge). Lionbridge is a leader in the market, with a very large localization division. Their testing business (Veritest) has roughly $20 million in testing revenue total, including games testing. Lionbridge also offers application development, and a full range of hardware and software QA and testing. With locations in multiple countries around the globe, they have a high profile in the market and are strongly positioned as the leader in localization/translation and globalization services. (www.veritest.com)

Critical Evaluation: Market Situation and Growth Opportunities

TTI has established a strong presence in the industry, with several high-profile clients. However, its business has been focused primarily on console games, which is not a high-growth segment of the market at the present time. Staying focused on this market segment alone will cause TTI's business to stagnate, thus it needs to seek find ways to grow revenues through one or more of the following approaches:

1. Increase the NUMBER of customers served: Increasing its customer base in its current console market segment through enhanced customer acquisition and retention campaigns

2. Increase VALUE of each customer through service-line extension: Expanding its service lines for the existing customer base to create upsell opportunities and grow same-customer revenue (increase the customer lifetime value)

3. Increase TYPE of customers served: Enter new market segments to broaden its customer base, offering the same service suite (or slightly modified versions) to new markets

Rapid growth is occurring in the segments of online and mobile gaming. In many respects, expanding its services to incorporate testing in both of these new segments would be a natural service-line extension for TTI, leveraging its brand identity as game test experts. Some investments in equipment and personnel would be required to be competitive in these segments. In terms of the subject matter expertise required, online game testing is relatively similar in nature to console testing, and many of the same development languages are used for both types of software. However, mobile games and applications are typically developed using different programming languages, primarily Java.

The software testing market is also growing rapidly, and is more than twice the size of the games testing market, thus presents a very attractive potential target. However, the most significant trend in outsourced software testing is the increasing use of Indian firms. India offers a technologically educated workforce yet at labor rates that can be much lower than those in the U.S., Canada, and Europe, creating significant downward price pressure in the market. Those software firms that outsource their testing are increasingly looking to India. TTI would have to pursue a cost-leadership positioning strategy to compete effectively in this market, a shift from what has been its successful differentiation strategy.

Marketing Analysis: To date, TTI has done little marketing. It has established a basic "brochure-ware" website presence, and appears with a small (10' x 10') or tabletop booth at game industry tradeshows. No industry-focused collateral, public relations, or other marketing campaign tactics have been tried. These avenues helped the company to acquire a handful of accounts, but only modest success has been seen with these limited marketing tactics.

The traditional customer communication stages are designed to move customers through each step in the response heirarchy: Awareness, Interest/Knowledge, Evaluation/Preference, Intention/Action/Trial/Purchase, and finally Advocacy (Kotler, 2001, p. 273). Historically, the company has done only minimal activity at the front end of the process, and their customer acquisition has been slow as a result.

The primary customer acquisition strategy has been relationship selling to a few targeted, large accounts, based on industry contacts of the company founders and executives, and customer referrals. To penetrate new markets in online, mobile and software testing and achieve continued growth, the company would need to engage in more defined marketing activities and brand building. While thus far TTI has been effective at growing the business to its current level and acquiring several large customers, the growth potential with those customer is now limited, and the company needs to begin attracting a larger number of new customer accounts. For this it must increase its visibility in the market and engage with the broader target customer base of game developers and publishers in both its existing (console) and new (mobile, online) market segments.

SWOT Analysis

Strengths

The strengths TTI has in the market and internally include:

Reputation

Top notch clients in games industry

Strong reputation as high-quality games test service provider

High customer satisfaction and willingness to refer (later stages of the customer engagement process)

Capabilities/Expertise

Deep domain expertise in designing and running test projects

Repeatable processes and internally-developed tools that promote efficiency and quality

Highly developed test lab security procedures

Flexibility and scalability to configure test labs and personnel to suit a multitude of customer project needs

Weaknesses

Low Market Awareness

Known only as a game testing company -- niche segment of the software industry.

Low brand awareness overall. Lack of investment in marketing means profile in the industry is low (early stages of the customer engagement process)

Lack of Domain Expertise Outside of Core Service Line

Little in-house expertise in mobile platform requirements like Java and J2ME

Marketing and Sales Process Gaps

Customer engagement and customer sales processes and tools are underdeveloped

Opportunities

Potential opportunities that TTI could choose to purse include:

Entry into new market segment: online game platforms

Entry into new market segment and service line extension: mobile game platforms

Launch new service line in packaged software testing

Threats

Competition from other test firms that offer broader range of services focused on game companies, e.g., multi-media

Some competitors are better capitalized/owned by larger firms so can sustain larger infrastructure investments

Companies in India and elsewhere offering testing services at low labor rates

Continued recession/economic slowdown impacting game and/or software development industries

Strengths

Reputation. With some of the leaders in the games industry among its clients (Electronic Arts, Microsoft Xbox), TTI has established credibility and expertise, that will help it open more doors in the game industry. Among firms that know of TTI and/or have worked with it, the quality of the game testing provided is well-known and acknowledged. Referral has been a strong source of customer acquisition. If TTI can find a way to leverage this reputation and bring more awareness to the broader market, it is poised to become the acknowledged game test leader, not just a "stealth" market leader. Positioning themes could include messages like "the best kept secret in game development."

Capabilities/Expertise. The company was founded by game and software testing experts who "had gaming in their DNA." They have built on this initial foundation to bring in some of the most highly skilled game development and testing experts in the industry. Over the last five years, they have created and refined testing specifications, processes, tools and test documentation protocols that consistently deliver some of the lowest "bug" rates in the industry, resulting in fewer customer complaints and lower technical support costs for TTI's customers once games are released to the market. These tools and processes also enable TTI to run projects with efficiency, keeping testing costs under control for its customers in an industry that too often sees testing budgets soar through the roof. Additionally, as a result of working with some of the market leaders in the highly competitive game development industry, TTI has created facility and electronic security procedures that help keep the intellectual property of its clients secure from piracy or pre-release market leaks. This level of security could be highly valuable to companies in certain highly competitive sectors of the general software market as well.

Flexible and Scalable. TTI's facility management and personnel management approaches have been refined to allow the company to rapidly scale up to meet customer needs in a hurry. Testing projects are often outsourced because the developer realizes they are running out of time before a delivery date to the publisher or release date to the market, thus they need extra manpower to help complete the testing process. TTI's "rapid launch" approach is a strong selling point.

Weaknesses

Low Market Awareness. Because of a lack of marketing, TTI has relatively low brand awareness in the software testing industry overall, and even in the game testing niche. Despite the high quality of its services and the high caliber of its customers, market awareness in order to start attracting a larger customer base within the game segment, let alone if it wishes to expand into other market segments like general software testing.

The company badly needs to develop communications approaches to raise awareness of the company in the marketplace, generate interest from new potential customers, and drive new customer acquisition (action).

Marketing Communications Process Gaps. As described above, the company's marketing strategies and tactics are weak in terms of their ability to engage customers effectively at each stage of the communication process (awareness, interest, etc.).

Lack of Domain Expertise Outside of Core Competency in Console Gaming. Despite TTI's outstanding expertise in game testing, the specialty needs of mobile platforms require an expanded set of tools and capabilities, such as Java programming expertise and platform certification by mobile developers. However, this expertise would not be difficult to obtain, for example, by hiring an experienced mobile testing manager.

Limited Capital Access. TTI is currently profitable and has access to business development loans. However, it would require a large amount of capital to invest in major facility expansion while also undertaking large-scale marketing campaigns into multiple markets simultaneously. It would be a risk to take on new lease obligations and new corporate debt, but a risk that could pay off if the new business lines take off strongly.

Sales Process Gaps. Additionally, TTI's sales engagement and sales support processes are also underdeveloped in terms of their ability to move brand new customers along the purchase path from the lead stage through closing the sale. As a business-to-business service provider, the sales engagement process is a key area the company needs to focus on. They have a good understanding of who are the key decision makers in the business purchase cycle, and are effective at managing relationships with those individuals when there is an existing personal connection or they have been referred by a personal connection. However, TTI's skills and processes are less well developed at building those relationships in an organization where they do not have a pre-existing connection: identifying initiators, influencers, users, deciders and approvers who are all key players in the buying decision within organizations (Kotler 2001, p. 113). They have virtually no customer relationship management (CRM) tools or strategies, and little formal pipeline management to move leads along each stage of the business purchase process.

Opportunities

New Market Segment. Adding online game testing services to TTI's existing services would be a very natural extension of its existing business. The same skill sets and expertise come into play and the facility, personnel and project management aspects are virtually identical. Thus, from an operational and execution perspective, this expansion would be almost a "no brainer" -- no new service line launches, just a refinement of existing services. From a branding standpoint, this offering would also be entirely consistent with the existing reputation and identity of the company as a game testing firm. From a marketing standpoint, what minimal marketing groundwork has been done previously to establish TTI in the game industry would still be completely relevant and consistent (e.g., the company already attends game industry tradeshows), and could be leveraged for the new services at little additional effort and expense.

Existing Service Line Extension. Adding mobile game testing services and entering into the mobile game testing market segment would be a very natural extension of its existing service line. An additional skill set in Java programming/testing and acquisition of cell devices for testing would be required, but otherwise, the same skill sets and expertise come into play and the facility, personnel and project management aspects are virtually identical to TTI's existing services. As with an entry into the online market segment, branding, positioning and marketing would all be completely consistent.

New Service Line. Launching a new service offering in software testing would also be a relatively short distance to travel from TTI's existing business, although more of a stretch from its current base in games. TTI would want to focus specifically on the packaged software testing market (i.e., consumer-oriented software that is sold "off-the-shelf"), which is closest in character to the games market. The market for enterprise software applications (e.g., programs like Oracle or Larson) are much more complex, and the testing procedures are very different, thus TTI's capabilities and processes would not be a good fit. TTI would have to build an enterprise testing business essentially from the ground up.

Threats

Threats to TTI's current business come from other testing companies that have specialty game industry practice areas. Some of these companies offer comparable services as TTI (software and hardware testing plus localization); others offer additional service specialties that give them a differentiator in the market, e.g., multi-media services.

Some competitors are better capitalized or are owned by larger firms that presumably have greater access to capital to invest in infrastructure and growth into new markets.

Companies in India and other low-cost-labor-markets are rapidly gaining ground in the testing industry (both software and games). In the game industry, unique skill specializations, the need to have a close communication with clients on projects (i.e., be located in a North American time zone) and in-country cultural awareness still play a significant role. Thus, TTI faces less threat of erosion of its business from customers migrating to overseas test providers. However, in the software industry, especially segments that offer various "utility" software applications or where functionality is the only consideration, Indian and other foreign test providers would be formidable competition for TTI in this market. Additionally, the presence of these foreign firms in the software testing industry has fostered a high degree of price sensitivity among software test customers, who are now well aware of the cost differential they can enjoy by working with an offshore vendor, and thus are demanding price cuts and discounts of U.S. firms as well.

An additional threat to TTI's business would be represented by a prolonging of the current economic downturn that results in game (and software) companies slowing their rate of development of new products and new release versions of existing products. This would impact the demand for game/software testing services. To date there has been some softening of the market over the last two years, but already in 2010 activity has begun to resume and future release schedules appear to be on track.

Conclusion

TTI has some significant strengths to draw on in the game testing market. Opportunities in the online and mobile gaming segments would leverage these strengths effectively, and present attractive opportunities for TTI to deepen its penetration into the various sub-segments of the game market, and increase its overall market share of game testing. To the extent the company has achieved brand recognition, game industry expansion would help promote and strengthen the existing brand. Additionally, the company could engage in growth into these areas with relatively modest investment in both marketing and operations.

The general software testing market presents a vast market opportunity, but it is also a highly competitive market, with many competitors in India taking advantage of low labor rates to drive prices down, thus any North American company would have to operate on razor-thin margins to be competitive. Software testing is becoming more "commoditized," where service offerings from vendors have little differentiation, and so purchase decisions are driven primarily on price. Stepping into the software testing industry would require more "heavy lifting" to establish a brand and create awareness where the TTI name is virtually unknown. While software testing projects could be undertaken successfully with only minor adjustments to TTI's existing skill set, but the effort to establish a foothold in the market would require substantial marketing investment.

However, it is critical that the company begin to pay attention to all of the stages in the marketing communications process to attract new customer in these new market segments. TTI will also need to refine its sales engagement process to handle a higher volume of leads/prospects and customers and close more sales.

In the current economic climate, an incremental approach to growth is more prudent than undertaking multiple new initiatives simultaneously on multiple fronts. A strategically targeted growth strategy that presents the best prospect of profitability should be what TTI focuses on in the near-term. Once the company has attained a solid position in one new segment, then it can build on that to reach further into another new segment.

Objectives

Growth targets for the next 3 years are:

Increase existing business line revenues in console game testing and localization by 5% per year, to $21 million by end of FY 2011, $22.5 million in FY2012, and $23.1 million in FY2013. (Note that the Fiscal Year ends March 31, so April 2, 2010 -- March 31, 2011 is FY 2011)

Capture $2 million in additional revenues from a successful launch into a new market segment in FY2011, $5 million in FY2012, and $8 million in FY2013.

Recommendations

Strategic Market Focus

As part of the business strategy for FY2011, TTI will not engage in product line extension, instead focusing on its current core competencies in games software testing, games hardware testing, and localization services. Building on those core competencies it should pursue new market opportunities in the following progression, which will make optimal use of the company's existing strengths:

FY2011 -- Expand into online game testing market segment

FY 2012 -- Expand into mobile game testing market segment

FY 2013 -- Pursue aggressive growth and capture market share in both online and mobile game segments, as well as continued growth in the console gaming segment. We can speculate that by 2013 at least one of the major console makers (Nintendo, Sony, Microsoft) will have launched or be preparing to launch a "next generation" game platform, which will drive rapid growth in the console sector for a year or so.

The company should not pursue the software testing market at this time.

Marketing Strategy

The cornerstone of TTI's marketing strategy going forward has to be building awareness in order to support its entry into new market segments. Creating a strong, instantly recognizable brand identity is key, reinforced across multiple channels. A more significant presence at industry events and increased public relations activity will also drive enhanced awareness of TTI as a game test company serving the whole industry (not just console games). In terms of the key communication stages (AIDA), this will support awareness.

To support a targeted expansion into the online gaming segment, TTI will engage in a focused campaign specifically geared towards companies that create online games. This will also drive awareness and interest.

Additionally, the company should take one or more of its most effective proprietary game testing tools and "brand" them, similar to the "Bug Tracker" tool promoted by a competitor. This will reinforce the company's differentiation in the market and positioning as experts in game testing. This will support the awareness and interest and begin to pique customer desire.

TTI's marketing team will also work with existing customers to create some focused case study collateral materials. In these case studies, a customer problem will be outlined, and then the story of how TTI was able to solve that problem and produce excellent results. These case studies will help to create desire, as prospective customers will be able to identify with the problem and imagine having their own challenges solved in the same way.