New Product Forecasting

 New product forecasting

 Forecasting using
Diffusion Models
 Forecasting using Pre-
Test Market Models (for
products with repeat
purchase)
 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?

ME New Product
Forecasting 2006 - 2
New Product Forecasting Models

 Forecasting using conjoint analysis

 Forecasting the pattern of new product adoptions (Bass

Model)

 Forecasting market share for new products in established

categories (Assessor pre-test market model)

ME New Product
Forecasting 2006 - 3
 Forecasting Based on
“Newness” of Products

• Repositioning • Breakthroughs—Major
H
i

Pre-test market model Product Modifications

Bass model/Conjoint
New to
World
• Line Extensions • “Me Too” Products
Simple pre-test market Conjoint/Pre-test
L
o

models (e.g., Bases) market models

Lo Hi

New to Company
ME New Product
Forecasting 2006 - 4
 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; 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

ME New Product
Forecasting 2006 - 5
 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?

ME New Product
Forecasting 2006 - 6
 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
ME New Product
Forecasting 2006 - 7
 Number of Registered Users
eBay (by Quarter)

210
200
190
180
170
million160
150
140
130
120
110
100
90
80
70
60
50 
40 Q1 0.09
30 Q2 0.15
20 Q3 0.25
10 Q4 0.40
0
1997 '98 '99 '00 '01 '02 '03 '04 '05 '06

Source: eBay/SEC filings ME New Product

Forecasting 2006 - 8
 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 influence)
N = Eventual number of adopters
# Adopters = n0 + n1 + • • • + nt–1
Remaining = Total Potential – # Adopters
Potential

ME New Product
Forecasting 2006 - 9
 Assumptions of the
Basic Bass Model

 Diffusion process is binary (consumer either adopts, or waits to

adopt).
 Constant maximum potential number of buyers (N).
 Eventually, all N will adopt the product.
 No repeat purchase, or replacement purchase.
 The impact of word-of-mouth is independent of adoption time.
 Innovation is independent of substitutes.
 The marketing strategies supporting an innovation are not explicitly
included.
 Uniform influence or complete mixing. That is, everyone in the
population knows everyone else, or is at least able to communicate
with, or observe everyone else.

ME New Product
Forecasting 2006 - 10
Representation as an Equation

 N (t ) 
n( t )  [ N  N ( t )] p  q  ...(1)
 N 

N(t) : Cumulative number of adopters until time t.

ME New Product
Forecasting 2006 - 11
Parameters of the Bass Model in
Several Product Categories
Innovation Imitation
Product/ parameter parameter
Technology (p) (q)

B&W TV 0.108 0.231

Color TV 0.059 0.146
Room Air conditioner 0.006 0.185
Clothes dryers 0.009 0.143
Ultrasound Imaging 0.000 0.534
CD Player 0.055 0.378
Cellular telephones 0.008 0.421
Steam iron 0.031 0.128
Oxygen Steel Furnace (US)0.002 0.435
Microwave Oven 0.002 0.357
Hybrid corn 0.000 0.797
Home PC 0.121 0.281

A study by Sultan, Farley, and Lehmann in 1990 suggests an

average value of 0.03 for p and an average value of 0.38 for q. ME New Product
Forecasting 2006 - 12
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, market structure, buyer
behavior, marketing-mix strategies of the firm, and
innovation characteristics.

ME New Product
Forecasting 2006 - 13
Forecasting Using the Bass Model—
Room Temperature Control Unit
Cumulative
Quarter Sales Sales

Market Size = 16,000

(At Start Price) 0 0 0
1 160 160
Innovation Rate = 0.01 4 425 1,118
(Parameter p) 8 1,234 4,678
12 1,646 11,166
Imitation Rate = 0.41 16 555 15,106
(Parameter q) 20 78 15,890
24 9 15,987
Initial Price = $400 28 1 15,999
32 0 16,000
Final Price = $400 36 0 16,000

Example computations
n( t )  pN  (q  p) N ( t  1)  (q / N ) N 2 ( t  1)
Sales in Quarter 1 = 0.01 16,000 + (0.41–0.01)  0 – (0.41/16,000)  (0)2 = 160
Sales in Quarter 2 = 0.01  16,000 + (0.40)  160 – (0.41/16,000)  (160)2 = 223.35
ME New Product
Forecasting 2006 - 14
 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 (eg, 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
ME New Product
Forecasting 2006 - 15
 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, and increases in retail outlets.
 Incorporating marketing variables
Coefficient of innovation (p) as a function of advertising
p(t) = a + b ln A(t).
Effects of price and detailing.

 Incorporating repeat purchases

 Multi-stage diffusion process
Awareness  Interest  Adoption  Word of mouth
 Incorporating Network Structure

ME New Product
Forecasting 2006 - 16
 Effects of Network Structure
(Household Products)

Distant links = 0
Distant links > 0
q – Degree of Influence

Average Density of Links

ME New Product
Forecasting 2006 - 17
 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

ME New Product
Forecasting 2006 - 18
 DirecTV
Data Collection Method

 CATI phone-mail-phone data collection-nationally

representative sample of TV viewers.
 15-minute phone interview. “Eligibles” assigned to one of
two monadic concept-price cells (“Intent to Buy”).
 Respondents mailed a color brochure that described
DIRECTV/RCA branded Direct Broadcast System
concept.
 Phone callback interview (22 minutes)-Key inputs: Stated
Intentions (Probability of Acquire and Perceived value
and Affordability).

ME New Product
Forecasting 2006 - 19
 Obtaining p, q, and N

 Guessing p and q from analogous previously

introduced product
 N from stated intentions in survey
 Average stated intent from survey = 32%
 Stated intentions overstate actual choices. How
much to discount stated intent to adopt?
 Also, have to adjust each year’s predicted sales for
awareness and availability (remember Kirin
case?)

ME New Product
Forecasting 2006 - 20
 Adjusting Stated Intentions to
Get Actual Purchase Behavior
Probability of purchase given stated intent for new durable and non-durable products. From Jamieson, Linda F. and
Frank M. Bass "Adjusting Stated Intention...To Predict Trial Purchase of New Products," JMR, August 1989.

45

40
Probability of Purchase
35 Increases with Stated Intention
30
Some Who Say
Probability of Purchase

25
Some Who Say They Will, Don’t
20 They Won’t, Do!
Purchase Increases with
15
Stated Intention

10

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

ME New Product
Forecasting 2006 - 21
 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 - 6/30/95 0.875 1.15 0.92 1.21
7/01/95 - 6/30/96 2.269 3.076 2.37 3.21
7/01/96 - 6/30/97 4.275 5.076 4.42 5.25
7/01/97 - 6/30/98 6.775 7.358 6.95 7.55
7/01/98 - 6/30/99 9.391 9.989 9.55 10.16
9.4 Million TV homes forecast for
June 99; Actual = 9.9 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).

ME New Product
Forecasting 2006 - 22
 Using Scenario Analysis
for Calibrating the Bass Model
 Structure a scenario as a flowing narrative, not as a set of numerical
parameters. Include verbal descriptions such as “rapid experience
effects,” “FCC adoption of digital standard,” etc. Ideally, each
scenario should also include how the situation described in the
scenario will be reached from the present position.
 Construct several scenarios that capture the richness and range of
the “possibilities” relevant to a decision situation. Describe all the
scenarios in the same manner, i.e., one is not more “vivid” than
another. Focus your further analyses on scenarios that are internally
consistent and plausible. Develop forecasts and strategies that are
compatible with the scenarios:
 Robust approaches that are resilient across scenarios (e.g.,
hedging, concurrent pursuit of multiple options, etc.)
 Contingent approaches that postpone major commitments to
the future.

ME New Product
Forecasting 2006 - 23
 Steps in Scenario Planning
for Zenith HDTV

 Identify the major stakeholders.

 Summarize the core trends that are relevant (technological,
economic, social, etc.) within the time frame of interest.
 Articulate the main uncertainties (e.g., TV studio adoption of
new filming methods).
 Construct an initial set of scenarios.
 Assess the consistency and plausibility of the scenarios.
 Create “themes” (i.e., a story with a name) that combine some
trends into meaningful composites (e.g., a Japanese domination
of hardware and American domination of software).
 Identify areas where you need more research (e.g., consumer
acceptance) and seek additional information.
 Associate the final set of scenarios with potential product
analogs for diffusion model, and select p and q.
 Evaluate decision consequences based on the implications of
the diffusion model.
ME New Product
Forecasting 2006 - 24
 Example “Middle of the Road” Scenario
(Zenith HDTV case)
The FCC makes a commitment to the 16:9 NTSC HDTV standard in 1994, with promises to
release details in a year. Initial HDTV sets cost over $3,000 and are seen as a luxury item,
little programming is available so new features (such as use as computer monitors and
compatibility with analog signals) are integrated to justify purchases. Art studios and other
display locations become innovators as they purchase units for displays. Interior designers
realize the benefits of HDTV plasma screens and suggest purchases to their wealthiest clients.
HDTV becomes a “nouveau riche” item, a status symbol much like luxury cars. By 2000, the
manufacturing costs of Plasma and other flat-screen displays decrease drastically from
standards integration and increased competition. Middle-class customers can now afford
HDTV displays. The movie industry embraces digital recordings because of the ease in
editing and persistent quality. New movie features (screen and TV) are filmed in 16:9 digital
format. Subsequent releases on DVD show higher quality. Public TV stations cannot justify
the cost of upgrading, but cable channels such as HBO and Showtime commit to upgrading in
2003. Their recent entry into movie-making and their purchase of new high-tech digital
recording equipment coincides with the need to upgrade transmission hardware. Customers
are then driven to adopt technology not for increased quality on regular programming, but for
movie watching, design, and display of other items.
ME New Product
Forecasting 2006 - 25
 Comparative Trajectories of Population/GDP
From Global Scenario Group

250
Gross World Product ($ trillions)

Conventional
Great Transition Worlds
Eco-communalism Policy Reform

Reference

New sustainability
paradigm
Fortress World
20
1990 Breakdown
Barbarization

5 Population (billions) 10

ME New Product
Forecasting 2006 - 26
 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, Skelly, and White
 Bases
 Assessor

ME New Product
Forecasting 2006 - 27
 Yankelovich, Skelly and White
Model
Forecast market share = S  N  C  R  U  K

where:
S =Lab store sales (indicator of trial),
N =Novelty factor of being in lab market. Discount sales by 20–40%
based on previous experience that relate trial in lab markets to trial in
actual markets,
C =Clout factor which retains between 25% and 75% of SN determined,
based on proposed marketing effort versus ad and distribution weights of
existing brands in relation to their market share,
R =Repurchase rate based on percentage of those trying who repurchase,
U =Usage rate based on usage frequency of new product as compared to
the new product category as a whole, and
K =Judgmental factor based on comparison of S N C R U K
with Yankelovich norms. The comparison is with respect to factors such
as size and growth of category, new product’s share derived from category
expansion versus conversion from existing brand.
ME New Product
Forecasting 2006 - 28
 BASES Model

Trial volume estimate

Calibrated Distribution
Awareness
Pt =  
intent score intensityt
levelt

Tt =Pt U0  (1/Sit)  (TM)  (1/CDI)

where:
Pt = Cumulative penetration up to time t
Tt =Total trial volume until time t in a particular target market
U0 =Average units purchased at trial (t = 0)
Sit = Seasonality index at time = t
TM = Size of target market ME New Product
CDI = Category development index for target market Forecasting 2006 - 29
 BASES Model cont’d

Repeat volume estimate


Rt =  Ni–1,t Yit Ui
i=1

where:
Ni–1,t =Cumulative number of consumers who repeat at least i–1
times by week t (N0,t = initial trial volume)
Yit =Conditional cumulative ith repeat purchase rate at week t
given that i–1 repeat purchases were made up to week t
Ui =Average units purchased at repeat level i

Ni–1,t & Yit are estimated based on consumers’ stated “after use intended
purchase frequency” and estimate of long-run decay in repeat rate.
Ui is estimated based on consumers’ stated purchase quantities.
ME New Product
Forecasting 2006 - 30
 BASES Model cont’d

Total volume estimate

St = Tt  Rt + Adjustments for promotional

volume

ME New Product
Forecasting 2006 - 31
 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 Brand Share Unit Sales
Estimates Diagnostics
Prediction Volume
ME New Product
Forecasting 2006 - 32
 Overview of ASSESSOR Measurement
Process

Design Procedure Measurement

O1 Respondent screening and Criteria for target-group identification

recruitment (personal interview) (eg, product-class usage)
O2 Pre-measurement for established Composition of ‘relevant set’ of
brands (self-administrated established brands, attribute weights
questionnaire) and ratings, and preferences
X1 Exposure to advertising for established
brands and new brands
[O3] Measurement of reactions to the Optional, e.g. likability and
advertising materials (self- 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, satisfaction ratings, and
repeat-purchase propensity; attribute ratings
and preferences for ‘relevant set’ of
established brands plus the new brand

O = Measurement; X = Advertsing or product exposure

ME New Product
Forecasting 2006 - 33
 Trial/Repeat Model

Market share for new product

Mn = T  R  W
where:
T=long-run cumulative trial rate (estimated from
measurement at O4)
R=long-run repeat rate (estimated from measurements at
O5 )
W=relative usage rate, with w = 1 being the average
market usage rate.

ME New Product
Forecasting 2006 - 34
 Trial Model

T = FKD + CU – (FKD)  (CU)

where:
F=long-run probability of trial given 100% awareness and 100%
distribution (from O4)

K=long-run probability of awareness (from managerial judgment)

D=long-run probability of product availability where target segment

shops (managerial judgment and experience)

C=probability of consumer receiving sample (Managerial judgment)

U=probability that consumer who receives a product will use it

(from managerial judgment and past experience)

ME New Product
Forecasting 2006 - 35
 Repeat Model

Obtained as long-run equilibrium of the switching matrix estimated from

(O2 and O5):
Time (t+1)
New Other
Newp(nn) p(no)
Time t
Otherp(on) p(oo)
p(.) are probabilities of switching where
p(nn) + p(no) = 1.0; p(on) + p(oo) = 1.0

Long-run repeat given by:

p(on)
r =––––––––––––––
1 + p(on) – p(nn)

ME New Product
Forecasting 2006 - 36
 Preference Model: Purchase
Probabilities Before New Product Use

(Vij)b
Lij = ––––––––
Ri
(Vik)b
k=1
where:

Vij=Preference rating from product j by participant i

Lij =Probability that participant i will purchase product j
Ri =Products that participant i will consider for purchase
(Relevant set)
b =An index which determines how strongly preference for
a product will translate to choice of that product (typical
range: 1.5–3.0)
ME New Product
Forecasting 2006 - 37
 Preference Model: Purchase
Probabilities After New Product Use
(Vij)b
L´ij = –––––––––––––––––
Ri
(Vin)b + (Vik)b
k=1
where:
L´it =Choice probability of product j after participant i
has had an opportunity to try the new product
b =index obtained earlier
Then, market share for new product:
L´in
M´n=En  –––
I N

n =index for new product

En =proportion of participants who include new
product in their relevant sets
N =number of respondents
ME New Product
Forecasting 2006 - 38
 Estimating Cannibalization
and Draw

Partition the group of participants into two: those who include new
product in their consideration sets, and those who don’t. The
weighted pre- and post- market shares are then given by:

Lin
Mj= –––
I N

L´in L´in
M´j=En  –––+ (1 – En)  –––
I N I N

Then the market share drawn by the new product from each of the
existing products is given by:

Dj=Mj – M´j
ME New Product
Forecasting 2006 - 39
 Example: Preference Ratings

Vij (Pre-use) V´ij (Post-use)

Customer B1 B2 B3 B4 B1 B2 B3 B4 New Product

10.1 0.0 4.9 3.7 0.1 0.0 2.6 1.7 0.2

21.5 0.7 3.0 0.0 1.6 0.6 0.6 0.0 3.1
32.5 2.9 0.0 0.0 2.3 1.4 0.0 0.0 2.3
43.1 3.4 0.0 0.0 3.3 3.4 0.0 0.0 0.7
50.0 1.3 0.0 0.0 0.0 1.2 0.0 0.0 0.0
64.1 0.0 0.0 0.0 4.3 0.0 0.0 0.0 2.1
70.4 2.1 0.0 2.9 0.4 2.1 0.0 1.6 0.1
80.6 0.2 0.0 0.0 0.6 0.2 0.0 0.0 5.0
94.8 2.4 0.0 0.0 5.0 2.2 0.0 0.0 0.3
100.7 0.0 4.9 0.0 0.7 0.0 3.4 0.0 0.9
ME New Product
Forecasting 2006 - 40
 Choice Probabilities

Lij (Pre-use) L´ij (Post-use)

Customer B1 B2 B3 B4 B1 B2 B3 B4 New Product

10.00 0.00 0.63 0.37 0.00 0.00 0.69 0.31 0.00

20.20 0.05 0.75 0.00 0.21 0.03 0.03 0.00 0.73
30.43 0.57 0.00 0.00 0.42 0.16 0.00 0.00 0.42
40.46 0.54 0.00 0.00 0.47 0.50 0.00 0.00 0.03
50.00 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00
61.00 0.00 0.00 0.00 0.80 0.00 0.00 0.00 0.20
70.01 0.35 0.00 0.64 0.03 0.61 0.00 0.36 0.00
80.89 0.11 0.00 0.00 0.02 0.00 0.00 0.00 0.98
90.79 0.21 0.00 0.00 0.82 0.18 0.00 0.00 0.00
100.02 0.00 0.98 0.00 0.04 0.00 0.89 0.00 0.07
Unweighted market
share (%) 38.0 28.3 23.6 10.1 28.1 24.8 16.1 6.7 24.3
New product’s draw from each brand
(Unweighted %) 9.9 3.5 7.5 3.4
New product’s draw from each brand
(Weighted by En in %) 2.0 0.7 1.5 0.7
ME New Product
Forecasting 2006 - 41
 Predicted and Observed Market
Shares for ASSESSOR
Deviation Deviation
Product Description Initial Adjusted Actual (Initial – (Adjusted –
Actual) Actual)

Deodorant 13.3 11.0 10.4 2.9 0.6

Antacid 9.6 10.0 10.5 –0.9 –0.5
Shampoo 3.0 3.0 3.2 –0.2 –0.2
Shampoo 1.8 1.8 1.9 –0.1 –0.1
Cleaner 12.0 12.0 12.5 –0.5 –0.5
Pet Food 17.0 21.0 22.0 –5.0 –1.0
Analgesic 3.0 3.0 2.0 1.0 1.0
Cereal 8.0 4.3 4.2 3.8 0.1
Shampoo 15.6 15.6 15.6 0.0 0.0
Juice Drink 4.9 4.9 5.0 –0.1 –0.1
Frozen Food 2.0 2.0 2.2 –0.2 –0.2
Cereal 9.0 7.9 7.2 1.8 0.7
Etc. ... ... ... ... ...

Average 7.9 7.5 7.3 0.6 0.2

Average Absolute Deviation — — — 1.5 0.6
Standard Deviation of Differences — — — 2.0 1.0
ME New Product
Forecasting 2006 - 42