Building a good product is hard, but building the right product is even harder.
The single-most reckless thing you can do when creating software is to not spend the time to understand your users. What are their desires? Their motivations? Behaviours? And needs? If you don't have a good handle on these, there's a fairly good chance that you'll end up building something that sounds good on paper, but isn't needed or useful in the real world.
Contextual inquiry is a research technique used to unearth what your users currently do and to probe their inner reasoning. It's best undertaken in the location where they're using your product (hence 'contextual') and it gives you that deep insight into how your product fits into the wider task. Your product or service is rarely used in isolation and fully-understanding all of the contributing environmental factors can lead to real competitive insight.
In essence, it's an interview with the user whilst they're using your product (or their current solution), with the researcher observing and probing the user to articulate what they are doing and why. It's far more exploratory than a usability test and is typically carried out early in the product development process.
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