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Forecasting

Principles in Marketing Engineering
Gary L. Lilien, Arvind Rangaswamy & Arnaud De Bruyn
Trafford
2007
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Managerial Issues Related to
Forecasting

 What is the purpose of developing the forecast?
 What, specifically, do we want to forecast (e.g., market
demand, technology trends)?
 How important is the past in predicting the future?
 What influence do we have in constructing the future?
 What method(s) should we use to develop the forecast?
 What factors could change the forecast?

Forecasting Methods

Market and
Survey Causal
Judgmental Analysis Time Series Analyses
Salesforce Buyer intentions Naïve methods Regression
composite analysis
Product tests Moving averages
Jury of executive Econometric
opinion Chain ratio Exponential models
method smoothing
Delphi methods Input-output
Box-Jenkins analysis
Scenario analysis method
MARMA
Decompositional
methods Neural networks

Methods for Forecasting
New Product Sales

Early stages of development
Chain ratio method
Judgmental methods
Scenario analysis
Diffusion model

Later stages of development
Pre-test market methods
Test-market methods

Chain Ratio Method (Estimate of Online Grocery Sales)  Number of households (2000 census) 105 million  Grocery purchases per household per year (52x120) $5300  % of sales from Supermarkets and grocery stores 84% (Progressive Grocer)  Households with children (married and unmarried – Census) 35%  % of households with Internet access (Census Bureau) 58%  Will order groceries online if available (Survey) 25%  Discount of survey intentions 50%  Online grocery shopping availability (guess) 40%  Awareness given availability (guess) 50%  Market forecast: $ ??? .

Definitely would buy 2. Definitely would not buy . May or may not buy (May be excluded from the scale) 4. Probably would not buy 5. Probably would buy 3. Intent-to-Buy Scale Used for Generating Some Inputs to Chain Ratio 1.

Who Are They? .

New Product Forecasting Models That We Consider  Forecasting the pattern of new product adoptions (Bass Model)  Forecasting market share for new products in established categories (Assessor pre-test market model)  Forecasting using conjoint analysis .

g. Forecasting Based on ―Newness‖ of Products • Repositioning • Breakthroughs—Major Hi Pre-test market model Product Modifications Bass model/Conjoint New to World • Line Extensions • ―Me Too‖ Products Lo Simple pre-test market Conjoint/Pre-test models (e.. Bases) market models Lo Hi New to Company .

Competitor monitoring & defense Innovation at maturity Design Identifying customer needs Sales forecasting Product positioning Engineering Go No Marketing mix assessment Segmentation Introduction Go No Launch planning Tracking the launch Testing Advertising & product testing Pretest & prelaunch forecasting Go No Test marketing . Overview of ―Stage-Gate‖ New Product Development Process Opportunity Identification Reposition Market definition Harvest Idea generation Life-Cycle Management Go No Market response analysis & fine tuning the marketing mix.

building a factory) with respect to the product. The Bass Diffusion Model of New Product Adoption The model attempts to answer the question: When will customers adopt a new product or technology? Why is it important to address this question? Helps in planning major investments (e.g. ..

Graphical Representation of The Bass Model (Cell Phone Adoption) Non-cumulative Adoptions. n(t) Adoptions due to internal influence Adoptions due to external influence pN Time .

15 Q3 0.25 15 Q4 0. Number of Registered Users eBay (by Quarter) million 225 210 195 180 165 150 135 120 105 90 75 60 1997 45 Q1 0.40 0 1997 '98 '99 '00 '01 '02 '03 '04 '05 '06 Source: eBay/SEC filings .09 30 Q2 0.

The Bass Diffusion Model for Durables nt = p  Remaining + q  Adopter Proportion  Potential Remaining Potential Innovation Imitation Effect Effect nt = n umber of adopters at time t (Sales) p = ―coefficient of innovation‖ (External influence) q = ―coefficient of imitation‖ (―internal‖ to the society in which the diffusion spreads) N = Eventual number of adopters # Adopters = n0 + n1 + • • • + nt–1 Remaining = Total Potential – # Adopters Potential .

 Constant maximum potential number of buyers ( ). . or observe everyone else. or replacement purchase. or waits to adopt).  Eventually. Assumptions of the Basic Bass Model  Diffusion process is binary (consumer either adopts.  Uniform influence or complete mixing. everyone in the population knows everyone else.  Innovation is independent of substitutes. That is. all will adopt the product.  The impact of word-of-mouth is independent of adoption time.  The marketing strategies supporting an innovation are not explicitly included. or is at least able to communicate with.  No repeat purchase.

.(1)  N  N(t) : Cumulative number of adopters until time t.Representation as an Equation  N (t )  n( t )  [ N  N ( t )] p  q  .. .

506 Steam iron 0.073 0.318 Oxygen Steel Furnace (US) 0.253 A study by Van den Bulte and Stremersch (2004) suggests an average value of 0.337 Hybrid corn 0.021 0.005 0.03 for p and an average value of 0.065 0.001 0.Parameters of the Bass Model in Several Product Categories Innovation Imitation Product/ parameter parameter Technology (p) (q) B&W TV 0.010 0.506 CD Player 0.454 Clothes dryers 0.000 0.798 Home PC 0. .456 Microwave Oven 0.003 0. The average was taken across a couple of hundred categories.018 0.368 Cellular telephones 0.42 for q.003 0.028 0.389 Ultrasound Imaging 0.335 Color TV 0.036 0.583 Room Air conditioner 0.

market structure. marketing-mix strategies of the firm.Estimating the Parameters of the Bass Model  Estimation using data  Regression  Specialized nonlinear estimation  Estimation using analogous products  Select analogous products based on the similarity in environmental context. . buyer behavior. and innovation characteristics.

234 4.106 (Parameter q) 20 78 15.999 32 0 16.01 4 425 1.40)  160 – (0.987 Initial Price = $400 28 1 15.35 .000 (At Start Price) 0 0 0 1 160 160 Innovation Rate = 0.118 (Parameter p) 8 1.000 + (0.41 16 555 15.41/16.166 Imitation Rate = 0.000 Example computations n( t )  pN  (q  p) N ( t  1)  (q / N ) N 2 ( t  1) Sales in Quarter 1 = 0.646 11.41–0.000 Final Price = $400 36 0 16.01  16.Forecasting Using the Bass Model— Room Temperature Control Unit Cumulative Quarter Sales Sales Market Size = 16.000)  (160)2 = 223.01)  0 – (0.000 + (0.890 24 9 15.01  16.678 12 1.41/16.000)  (0)2 = 160 Sales in Quarter 2 = 0.

g. does it involve switching from familiar way of doing things?)  Communication channels used  Nature of ―links‖ among market participants  Nature and effect of promotional efforts Source: Everett Rogers .. Factors Affecting the Rate of Diffusion Product-related  High relative advantage over existing products  High degree of compatibility with existing approaches  Low complexity  Can be tried on a limited basis  Benefits are observable Market-related  Type of innovation adoption decision (e.

 Incorporating marketing variables  Incorporating repeat purchases  Multi-stage diffusion process Awareness  Interest  Adoption  Word of mouth  Incorporating Network Structure . and increases in retail outlets. Some Extensions to the Basic Bass Model  Varying market potential As a function of product price. reduction in uncertainty in product performance. and growth in population.

Example Application of Bass Model DirecTV (History and Technology)  1984 FCC grants GM Hughes approval to construct a Direct Broadcast Satellite system (DBS)  High Ku Band frequency  Early 1990‘s technological breakthrough in digital compression. Result: Affordable product and non- obtrusive dish and equipment  Changed economics of DTH broadcasting  1991 DIRECTV founded .

 15-minute phone interview. ―Eligibles‖ assigned to one of two monadic concept-price cells (―Intent to Buy‖).nationally representative sample of TV viewers.  Respondents mailed a color brochure that described DIRECTV/RCA branded Direct Broadcast System concept. DirecTV Data Collection Method  CATI (Computer-Assisted Telephone Interview) data collection .  Phone callback interview (22 minutes)-Key inputs: Stated Intentions (Probability of Acquire and Perceived value and Affordability). .

have to adjust each year‘s predicted sales for actual levels of awareness and availability of product in the entire market. . q. How much to discount stated intent to adopt? (They discounted by 50%)  Also. Obtaining p. and N  Guessed p and q from analogous previously introduced product  N obtained from stated intentions in survey  Average stated intent from survey = 32%  Stated intentions overstate actual choices.

" JMR. Do! Purchase Increases with 15 Stated Intention 10 5 0 Definitely Will Not Buy Probably Will Not Buy Might or Might Not Buy Probably Will Buy Definitely Will Buy Actual Purchase Probablity Given Stated Intention for 5 Non-Durable Products Actual Purchase Probability Given Stated Intention for 5 Durable Products . and Frank M. 45 Probability of Purchase (within six months) 40 Increases with Stated Intention 35 30 Probability of Purchase 25 Some Who Say Some Who Say They Will. Linda F. Adjusting Stated Intentions to Get Actual Purchase Behavior Probability of purchase given stated intent for new durable and non-durable products. Don’t 20 They Won’t..To Predict Trial Purchase of New Products. Bass "Adjusting Stated Intention. August 1989. From Jamieson..

6/30/96 2.9 Million Forecast based on p and q of Cable TV (other alternative considered was Color TV) and maximum penetration set to 16% of population (half that in the stated intent survey).6/30/98 6.55 10.076 2.875 1.358 6.95 7. Multi-Year Forecast and Actual 1992 Forecast Actual Number of 1992 Forecast of Actual Yearly Number of TV TV Homes Percent of TV Percent of TV Homes Acquiring Acquiring Satellite Homes with Homes with Satellite Television Television Satellite Television Satellite Television Year (Million) (Million) (Percentage) (Percentage) 7/01/94 . .15 0.275 5. Actual = 9.25 7/01/97 .42 5.6/30/99 9.21 7/01/95 .16 9.269 3.989 9.21 7/01/96 .6/30/97 4.775 7.55 7/01/98 .92 1.391 9.4 Million TV homes forecast for June 99.076 4.37 3.6/30/95 0.

Multi-Year Forecast-Actual Graph 92 Forecast Was Not Updated .

Ideally. etc. Using Scenario Analysis for Calibrating the Bass Model  Structure a scenario as a flowing narrative. Describe all the scenarios in the same manner. each scenario should also include how the situation described in the scenario will be reached from the present position. hedging. Develop forecasts and strategies that are compatible with the scenarios.)  Contingent actions that postpone major commitments to the future.. i.‖ ―FCC adoption of digital standard.g.  Construct several scenarios that capture the richness and range of the ―possibilities‖ relevant to a decision situation.. . one is not more ―vivid‖ than another.‖ etc. Focus your further analyses on scenarios that are internally consistent and plausible. concurrent pursuit of multiple options.e. not as a set of numerical parameters. The strategies include:  Robust actions that are resilient across scenarios (e. Include verbal descriptions such as ―rapid experience effects.

Steps in Scenario Planning (Example for Zenith HDTV)  Identify the major stakeholders. social...  Associate the final set of scenarios with potential product analogs for diffusion model.  Summarize the core trends that are relevant (technological. and generate the forecasts..) within the time frame of interest.  Articulate the main uncertainties (e.  Create ―themes‖ (i.g.g. etc. select p and q.  Evaluate strategic and tactical choices that will help you realize the forecasts in the most cost effective manner.  Assess the consistency and plausibility of the scenarios. consumer acceptance) and seek additional information. a Japanese domination of hardware and American domination of software). a story with a name) that combine some trends into meaningful composites (e..  Construct an initial set of scenarios.g.e. .  Identify areas where you need more research (e. economic. TV studio adoption of new filming methods).

Example ―Middle of the Road‖ Scenario (Zenith HDTV case) The FCC makes a commitment to the 16:9 NTSC HDTV standard in 1994. HDTV becomes a ―nouveau riche‖ item.000 and are seen as a luxury item. Public TV stations cannot justify the cost of upgrading. Initial HDTV sets cost over $3. . Customers are then driven to adopt technology not for increased quality on regular programming. New movie features (screen and TV) are filmed in 16:9 digital format. Interior designers realize the benefits of HDTV plasma screens and suggest purchases to their wealthiest clients. design. By 2000. but cable channels such as HBO and Showtime commit to upgrading in 2003. with promises to release details in a year. The movie industry embraces digital recordings because of the ease in editing and persistent quality. and display of other items. the manufacturing costs of Plasma and other flat-screen displays decrease drastically from standards integration and increased competition. but for movie watching. little programming is available so new features (such as use as computer monitors and compatibility with analog signals) are integrated to justify purchases. Subsequent releases on DVD show higher quality. Middle-class customers can now afford HDTV displays. Their recent entry into movie-making and their purchase of new high-tech digital recording equipment coincides with the need to upgrade transmission hardware. Art studios and other display locations become innovators as they purchase units for displays. a status symbol much like luxury cars.

Comparative Trajectories of Population/GDP From Global Scenario Group 250 Conventional Gross World Product ($ trillions) Great Transition Worlds Eco-communalism Policy Reform Market Forces New sustainability paradigm Fortress World 20 1990 Breakdown Barbarization 5 Population (billions) 10 .

g. Pretest Market Models  Objective Forecast sales/share for new product before a real test market or product launch  Conceptual model Awareness  Availability  Trial  Repeat  Commercial pre-test market services  Yankelovich.. BASES) . Skelly. and White  Assessor  Others (e.

N = Novelty factor of being in lab market. Skelly and White Model (Chain Ratio Method) Forecast market share = S  N  C  R  U  K where: S = Lab store sales (indicator of trial). The comparison is with respect to factors such as size and growth of category. based on proposed marketing effort versus ad and distribution weights of existing brands in relation to their market share. C = Clout factor which retains between 25% and 75% of SN determined. U = Usage rate based on usage frequency of new product as compared to the new product category as a whole. Yankelovich. . and K = Judgmental factor based on comparison of S  N  C  R  U  K with Yankelovich norms. new product‘s share derived from category expansion versus conversion from existing brand. Discount sales by 20–40% based on previous experience that relate trial in lab markets to trial in actual markets. R = Repurchase rate based on percentage of those trying who repurchase.

Overview of ASSESSOR Modeling Procedure Management Input Consumer Research Input (Positioning Strategy) (Laboratory Measures) (Marketing Plan) (Post-Usage Measures) Preference Trial & Model Repeat Model Reconcile Outputs Draw & Cannibalization Estimates Brand Share Unit Sales Diagnostics Prediction Volume .

attribute weights questionnaire) and ratings. and preferences X1 Exposure to advertising for established brands and new brands [O3] Measurement of reactions to the Optional. believability ratings of advertising administered questionnaire) materials X2 Simulated shopping trip and exposure to display of new and established brands O4 Purchase opportunity (choice recorded Brand(s) purchased by research personnel) X3 Home use/consumption of new brand O5 Post-usage measurement (telephone New-brand usage rate. and repeat-purchase propensity. attribute ratings and preferences for ‗relevant set‘ of established brands plus the new brand O = Measurement..g. X = Advertising or product exposure . likability and advertising materials (self. e.g. Overview of ASSESSOR Measurement Process Design Procedure Measurement O1 Respondent screening and Criteria for target-group identification recruitment (personal interview) (e. product-class usage) O2 Pre-measurement for established Composition of ‗relevant set‘ of brands (self-administrated established brands. satisfaction ratings.

9 5.0 2...0 21.0 10..5 7.9 4.1 Frozen Food 2.5 Pet Food 17.2 Cereal 9.0 4.2 –0.0 –0.6 10.0 3.2 1.6 Antacid 9.0 3.9 7.8 1.2 –0.0 1.5 0.0 7.7 Etc..3 11.0 2... Predicted and Observed Market Shares for ASSESSOR Deviation Deviation Product Description Initial Adjusted Actual (Initial – (Adjusted – Actual) Actual) Deodorant 13.2 3.2 –0.6 0.0 –5.0 Analgesic 3. .0 12.6 15.5 –0.0 0. Average 7.5 Shampoo 3.3 0.2 Shampoo 1.0 . .1 Cleaner 12..0 1.0 22.5 –0.0 Juice Drink 4.1 –0.3 4.0 2.0 –1.9 7.4 2.8 0.1 –0..0 3.6 0.. .9 0.0 10. .8 0.6 15.2 Average Absolute Deviation — — — 1.5 –0.0 12.0 Cereal 8..0 1.6 Standard Deviation of Differences — — — 2.9 –0.2 –0. .9 –0.8 1.1 Shampoo 15.

049 Switchback rate of non Retention rate purchasers 0.211 implementation Repurchase rate for purchasers 0.80 from advertising •Actual Ad $ 0.42 Source: Adapted from Thomas Burnham . of awareness •Max awareness 0.235 Prob.16 GIVEN trial Generalization of As implemented Assessor for those who in Assessor saw ad 0.70 with unlimited Ad Long-term •Ad $ for 50% Distribution Prob. awareness estimate 0. trial advertising •Actual Ad $ Awareness estimate 0. of availability market share max. ASSESSOR Trial & Repeat Model Market Share Due to Advertising Response Mode Manual Mode % making first purchase •Max trial with GIVEN awareness & unlimited Ad % buying brand in availability simulated shopping % making first •Ad$ for 50% 0.42 purchase due to max.

32 % Delivered 0. Number Proportion of market overlap 0. ASSESSOR Trial & Repeat Model Market Share Due to Sampling Correction for Cumulative trial sampling/ad (previous chart) Sampling.169 Source: Adapted from Thomas Burnham .80 40 million Net incremental households those not buying trial in simulation Sample use in in target 0.26 0.075 0.15 Long-term market Repurchase rate of Long term repeat share from sampling those not buying in Prob.235 Delivered 30M using samples 12. of repurchase rate for sample 0.96/40 = 0.26 market simulation 0. of switching previous time period to brand 0.011 simulation of brand receivers 0.90 % of those delivered Assumes First repeat for hitting target 0.245 0.60 Switchback rate for non-purchasers in Prob.

202 post entry cannibalization market shares calculations 0. ASSESSOR Preference Model Summary Pre-use preference ratings Beta (B) for Pre-entry market choice model shares Pre-use constant sum evaluations Pre-use choices Post-entry market Post-use preference shares (assuming Post-use constant ratings consideration sum evaluations 0.243 Cumulative trial Proportion of from ad consumers who (T&R model) consider product 0.057 Source: Adapted from Thomas Burnham .235 Predicted Draw & 0.

9 Company factory sales 49.057 Source: Adapted from Thomas Burnham .82M Return unit margin on 0.060 4.6M Market size market share Unit-dollar 40M 52.94 Average annual sales per Frequency of use household $22 Price differences differences 1.581 sales Company 38% Ad/sampling factory sales expense 49.04 0.0/6. ASSESSOR Market Share to Financial Results Diagrams Market share Company 0.8M adjustment 0.06 Industry average factory sales sales for realized 49.6M Note: Market share from Trial/Repeat Model: 0.6M Net Contribution Average 18.0M Market Share from Preference Model: 0.

a new technology or trend)  Pre-test market models are useful for forecasting products that have repeat purchase potential (e. We will cover one judgmental method (Delphi method) when discussing Resource Allocation models developed based on managerial judgment.  Bass diffusion model is useful for forecasting the adoptions of a new to the world product (e. . consumer packaged goods).. Recap  Judgmental methods and Chain ratio approach can be applied in a wide range of forecasting situations.g.g..