Forecasting-the-Adoption-of-a-New-Product

[e-mail]617-783-7860.9-505-062REV:AUGUST7,2007________________________________________________________________________________________________________________ProfessorElieOfekandResearchAssociatePeterWickershampreparedthisnoteasthebasisforclassdiscussion.Copyright©2005,2007PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.ELIEOFEKForecastingtheAdoptionofaNewProductTheartofprophecyisverydifficult—especiallywithrespecttothefuture.—MarkTwainThedevelopmentandlaunchofanewproductintothemarketplacecanbeaveryexcitingtimeforallofthoseinvolvedintheprocess,especiallywhenitisanovelproductthatservesapreviouslyunmetconsumerneed.If,forexample,oneisamemberofateampreparingforthelaunchofanewportableenginethatisnotonlymorepowerfulthancurrentcombustionenginesbutalsousesone-tenthofthenaturalresources,thenitisunderstandabletofeelgreatprideinthethoughtofbringingthisproducttomarket.Formarketingmanagers,however,theanticipationandexcitementoflaunchinganewproductshouldbequicklytemperedbythetaskofforecastingitsdemandor,putanotherway,predictingboththeadoptionoftheproductbyconsumersimmediatelyfollowingitslaunchaswellasthepathofthisadoptionovertheexpectedlifetimeoftheproduct.ThequotationabovebyMarkTwainhumorouslydescribesthedifficultyofmakingpredictionsingeneral,butonecouldarguethatthesameistrueinforecastingthedemandofnewproducts.Despitethechallengesinvolvedincreatingreliableforecasts,thereisnoquestionthatdemandforecastsfornewproductsguidemanycriticaldecisionsfacedbyacompany.Onesuchdecisionishowmuchofthenewproducttoproduceinordertomeetdemandatlaunchandinthemonthsandyearsahead.Anotherdecisionishowmuchtoofferinpromotionaldiscountsorpricecutsandtheeffectthiswillhaveinspeedingtheadoptionofthenewproduct.Clearlythereisanexpectationthatconsumeradoptionwillbebetterifthefirmspendsmoreonpromotionoradvertising,buthowmuchwillitaffecttheadoptioncurve?Ananalyticalframeworkformodelingthefirst-purchasegrowthofanewproductwasfirstpresentedbyFrankBassin1969.1Intheyearssinceitsintroduction,ithascometobecalledanew-productdiffusionmodel,givenitspremiseofhowinformationaboutaproductiscommunicatedbetweenmembersofasocialsystem,butmoresimplyitisjustcalled“theBassmodel.”Atahighlevel,theBassmodelisusedtodeterminetheshapeofthecurverepresentingcumulativeadoptionofthenewproduct.However,asananalyticalframework,itcanalsobeusedtoaddressmanypre-launch,launch,andpost-launchstrategicdecisionsaboutanewproductsuchasthosementionedinthepreviousparagraph.1FrankM.Bass,“ANewProductGrowthModelforConsumerDurables,”ManagementScience15:5(1969):215–[e-mail]617-783-7860.505-062ForecastingtheAdoptionofaNewProduct2ThepurposeofthisnoteistoreviewseveralkeyconceptsoftheBassmodelandtoillustratetheseconceptsthroughacaseexample.SomeextensionsoftheBassmodel,includingtheincorporationofmarketing-mixvariables,arethendiscussedaswellasissuesofcompetitionbetweenfirms.Finally,theBassmodeliscomparedwithmodelsthatusehistoricaldataoftheproducttoforecastnext-periodsales.OverviewoftheBassModelTheBassmodelisbothintuitiveandsimple,whichcouldbeonereasonwhyitissowidelyusedtoday.Themodelinitsbasicformusuallyassumesthataconsumercanadoptthenewproductonlyonce;asaresult,themodelistypicallyappliedtodurableproductssuchasappliances,televisions,orotherproductsthatareonlypurchasedonceeveryfewyears.2Themodelisalsorelevantformodelingthefirsttimeanindividualbeginsusinganewproductorservice.ThegeneraltheorybehindtheBassmodelmakesassertionsofhowinformationaboutanewproductispassedbetweenindividualsinasocialsystemandhowthisaffectstheirtimingofadoption.Itisbelievedthatsomeindividualsdecidetoadoptaninnovationindependentlyoftheactionsofothers;theseindividualsaredubbedinnovators.AsBassdescribesinhis1969paper,“innovatorsaredescribedasbeingventuresomeanddaring.”Otherindividualsinthesystemareinfluencedtoadoptanewproductwhentheyobservethatmoreandmorepeoplehavealreadydoneso.Thatis,theyrespondtotheinfluencesofthesocialsystemandobtaininformationaboutanewproductfromthosethathavealreadyadoptedtheproduct;theseindividualsarecalledimitators.Atthispoint,beforeweexaminethekeyparametersoftheBassmodel,itisnecessarytodefinesomebasictermsthatwillbeusedtodescribetheBassmodelinequationform.Sincethemodeldescribestheadoptioncurveofanewproduct,werequireasetofvariablestorepresentthoseconsumerswhohaveadoptedthenewproductbyaparticulartimepointaswellasawaytorepresentthosewhohavenotadoptedthenewproduct.Thus,let’sdefinethefollowing:•N(t)isthetotalorcumulativenumberofconsumerswhohavealreadyadoptedthenewproductthroughperiodt.•N(t–1)isthecumulativenumberofadoptersforthenewpro