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The Bass Diffusion Model Model designed to answer the question: When will customers adopt a new product or technology?

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Presentation on theme: "The Bass Diffusion Model Model designed to answer the question: When will customers adopt a new product or technology?"— Presentation transcript:

1 The Bass Diffusion Model Model designed to answer the question: When will customers adopt a new product or technology?

2 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 buy the product No repeat purchase, or replacement purchase The impact of the word-of-mouth is independent of adoption time Innovation is considered independent of substitutes The marketing strategies supporting the innovation are not explicitly included

3 Adoption Probability over Time Time (t) Cumulative Probability of Adoption up to Time t F(t)F(t) Introduction of product (a) Time (t) Density Function: Likelihood of Adoption at Time t f(t) =d(F(t)) dt (b) 1.0

4 Number of Cellular Subscribers Source: Cellular Telecommunication Industry Association 9,000, ,000,000 5,000,000 Years Since Introduction

5 Sales Growth Model for Durables (The Bass Diffusion Model) S t =p Remaining+q Adopters PotentialRemaining Potential InnovationImitation EffectEffect where: S t =sales at time t p=coefficient of innovation q=coefficient of imitation # Adopters=S 0 + S S t–1 Remaining=Total Potential – # Adopters Potential

6 Parameters of the Bass Model in Several Product Categories InnovationImitation Product/parameter parameter Technology (p)(q) B&W TV Color TV Air conditioners Clothes dryers Water softeners Record players Cellular telephones Steam irons Motels McDonalds fast food Hybrid corn Electric blankets 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.

7 Technical Specification of the Bass Model The Bass Model proposes that the likelihood that someone in the population will purchase a new product at a particular time t given that she has not already purchased the product until then, is summarized by the following mathematical. Formulation Let: L(t):Likelihood of purchase at t, given that consumer has not purchased until t f(t): Instantaneous likelihood of purchase at time t F(t): Cumulative probability that a consumer would buy the product by time t Once f(t) is specified, then F(t) is simply the cumulative distribution of f(t), and from Bayes Theorem, it follows that: L(t) = f(t)/[1–F(t)](1)

8 Technical Specification of the Bass Model contd The Bass model proposes that L(t) is a linear function: q L(t) = p +––N(t)(2) N where p=Coefficient of innovation (or coefficient of external influence) q=Coefficient of imitation (or coefficient of internal influence) N(t)=Total number of adopters of the product up to time t N=Total number of potential buyers of the new product Then the number of customers who will purchase the product at time t is equal to Nf(t). From (1), it then follows that: q Nf(t) = [ p +––N(t)][1 – N(t)](3) N Nf(t) may be interpreted as the number of buyers of the product at time t [ = (t)]. Likewise, NF(t ) is equal to the cumulative number of buyers of the product up to time t [ = N(t)].

9 Bass Model contd Noting that [n(t) = Nf(t)] is equal to the number of buyers at time t, and [N(t) = NF(t)] is equal to the cumulative number of buyers until time t, we get from (2): q Nf(t) = [ p +––N(t)][1 – N(t)](3) N After simplification, this gives the basic diffusion equation for predicting new product sales: q n (t) = pN + (q – p) [N(t)] – ––[N(t)] 2 (4) N

10 Estimating the Parameters of the Bass Model Using Non-Linear Regression An equivalent way to represent N(t) in the Bass model is the following equation: q n(t)=p +––N(t–1) [N – N(t–1)] N Given four or more values of N(t) we can estimate the three parameters of the above equation to minimize the sum of squared deviations.

11 Estimating the Parameters of the Bass Model Using Regression The discretized version of the Bass model is obtained from (4): n(t) =a + bN(t–1) + cN 2 (t–1) a, b, and c may be determined from ordinary least squares regression. The values of the model parameters are then obtained as follows: –b – b 2 – 4ac N=–––––––––––––– 2c a p=–– N q=p + b To be consistent with the model, N > 0, b 0, and c < 0.

12 Forecasting Using the Bass ModelRoom Temperature Control Unit Cumulative QuarterSales Sales Market Size=16,000 (At Start Price) Innovation Rate= ,118 (Parameter p)81,2344, ,64611,166 Imitation Rate= ,106 (Parameter q)207815, ,987 Initial Price=$ , ,000 Final Price=$ ,000 Example computations n(t)=pN + (q–p) N(t–1) – q N(t–1) 2 /N Sales in Quarter 1= ,000 + (0.41–0.01) 0 – (0.41/16,000) (0) 2 = 160 Sales in Quarter 2= ,000 + (0.40) 160 – (0.41/16,000) (160) 2 =

13 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

14 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. Incorporation of 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

15 Pretest Market Models Objective Forecast sales/share for new product before a real test market or product launch Conceptual model Awareness x Availability x Trial x Repeat Commercial pre-test market services –Yankelovich, Skelly, and White –Bases –Assessor

16 A SSESSOR Model Objectives Predict new products long-term market share, and sales volume over time Estimate the sources of the new products share, which includes cannibalization of the firms existing products, and the draw from competitor brands Generate diagnostics to improve the product and its marketing program Evaluate impact of alternative marketing mix elements such as price, package, etc.

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

18 Overview of A SSESSOR Measurements DesignProcedureMeasurement O 1 Respondent screening and Criteria for target-group identification recruitment (personal interview) (eg, product-class usage) O 2 Pre-measurement for established Composition of relevant set of brands (self-administrated established brands, attribute weights questionnaire) and ratings, and preferences X 1 Exposure to advertising for established brands and new brands [O 3 ]Measurement of reactions to theOptional, e.g. likability and advertising materials (self- believability ratings of advertising administered questionnaire) materials X 2 Simulated shopping trip and exposure to display of new and established brands O 4 Purchase opportunity (choice recordedBrand(s) purchased by research personnel) X 3 Home use/consumption of new brand O 5 Post-usage measurement (telephoneNew-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

19 Trial/Repeat Model Market share for new product M n = T R W where: T=long-run cumulative trial rate (estimated from measurement at O 4 ) R=long-run repeat rate (estimated from measurements at O 5 ) W=relative usage rate, with w = 1 being the average market usage rate.

20 Trial Model T = FKD + CU – (FKD) (CU) where: F=long-run probability of trial given 100% awareness and 100% distribution (from O 4 ) 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)

21 Repeat Model Obtained as long-run equilibrium of the switching matrix estimated from (O 2 and O 5 ): Time (t+1) NewOther 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)

22 Preference Model: Purchase Probabilities Before New Product Use where: V ij =Preference rating from product j by participant i L ij =Probability that participant i will purchase product j R i =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) (V ij ) b L ij = –––––––– R i (V ik ) b k=1

23 Preference Model: Purchase Probabilities After New Product Use 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 =E n ––– I N n=index for new product E n =proportion of participants who include new product in their relevant sets N=number of respondents (V ij ) b L´ ij = ––––––––––––––––– R i (V in ) b + (V ik ) b k=1

24 Estimating Cannibalization and Draw Partition the group of participants into two: those who include new product in their consideration sets, and those who dont. The weighted pre- and post- market shares are then given by: L in M j = ––– I N L´ in L´ in M´ j =E n –––+ (1 – E n ) ––– I N Then the market share drawn by the new product from each of the existing products is given by: D j =M j –M´ j

25 Example: Preference Ratings V ij (Pre-use)V´ ij (Post-use) Customer B1B2B3B4B1B2B3B4New Product

26 Choice Probabilities L ij (Pre-use)L´ ij (Post-use) Customer B1B2B3B4B1B2B3B4New Product Unweighted market share (%) New products draw from each brand (Unweighted %) New products draw from each brand (Weighted by E n in %)

27 Assessor Trial & Repeat Model Market Share Due to Advertising Max trial with unlimited Ad Ad$ for 50% max. trial Actual Ad $ Max awareness with unlimited Ad Ad $ for 50% max. awareness Actual Ad $ % buying brand in simulated shopping Awareness estimate Distribution estimate (Agree) Switchback rate of non-purchasers Repurchase rate of simulation purchasers % making first purchase GIVEN awareness & availability 0.23 Prob. of awareness 0.70 Prob. of availability 0.85 Prob. of switching TO brand 0.16 Prob. of repurchase of brand 0.60 % making first purchase due to advertising Retention rate GIVEN trial for ad purchasers Response ModeManual Mode Long-term market share from advertising 0.39 Source: Thomas Burnham, University of Texas at Austin

28 Assessor Trial & Repeat Model Market Share Due to Sampling Sampling coverage (%) % Delivered 0.90 % of those delivered hitting target 0.80 Simulation sample use Switchback rate of non-purchasers Repurchase rate of simulation non-purchasers Prob. of switching TO brand 0.16 Prob. of repurchase of brand Long-term market share from sampling 0.02 % hitting target that get used 0.60 Retention rate GIVEN trial for sample receivers Correction for sampling/ad overlap (take out those who tried sampling, but would have tried due to ad) Market share trying samples Source: Thomas Burnham, University of Texas at Austin

29 Assessor Preference Model Summary Source: Thomas Burnham, University of Texas at Austin Pre-use constant sum evaluations Post-use constant sum evaluations Cumulative trial from ad (T&R model) Beta (B) for choice model Pre-entry market shares Post-entry market shares (assuming consideration Weighted post entry market shares Pre-use preference ratings Pre-use choices Post-use preference ratings Proportion of consumers who consider product Draw & cannibalization calculations

30 Assessor Market Share to Financial Results Diagrams Market share Market size 60M Sales per person $5 JWC factory sales 16.7 Average unit margin Ad/sampling expense 4.5/3.5 Net contribution JWC factory sales 16.7 Industry average sales $ for market share 17.7 JWC factory sales Frequency of use differences 0.9 Unit-dollar adjustment 0.94 Price differences 1.04 Return on sales Source: Thomas Burnham, University of Texas at Austin

31 Predicted and Observed Market Shares for A SSESSOR Deviation Deviation Product Description Initial Adjusted Actual (Initial – (Adjusted – Actual) Actual) Deodorant Antacid –0.9–0.5 Shampoo –0.2–0.2 Shampoo –0.1–0.1 Cleaner –0.5–0.5 Pet Food –5.0–1.0 Analgesic Cereal Shampoo Juice Drink –0.1–0.1 Frozen Food –0.2–0.2 Cereal Etc Average Average Absolute Deviation Standard Deviation of Differences

32 B ASES Model Trial volume estimate CalibratedDistributionAwareness P t = intent scoreintensity t level t T t =P t U 0 (1/Si t ) (TM) (1/CDI) where: P t = Cumulative penetration up to time t T t =Total trial volume until time t in a particular target market U 0 =Average units purchased at trial (t = 0) Si t = Seasonality index at time = t TM = Size of target market CDI = Category development index for target market

33 Repeat volume estimate R t = N i–1,t Y it U i i=1 where: N i–1,t =Cumulative number of consumers who repeat at least i–1 times by week t (N 0,t = initial trial volume) Y it =Conditional cumulative ith repeat purchase rate at week t given that i–1 repeat purchases were made up to week t U i =Average units purchased at repeat level i N i–1,t & Y it are estimated based on consumers stated after use intended purchase frequency and estimate of long-run decay in repeat rate. U i is estimated based on consumers stated purchase quantities. B ASES Model contd

34 Total volume estimate S t = T t R t + Adjustments for promotional volume

35 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 products share derived from category expansion versus conversion from existing brand.

36 Some Issues in Validating Pre-Test Models Validation does not include products that were withdrawn as a result of model predictions Pre-test and actual launch are separated in time, often by a year or more Marketing program as implemented could be different from planned program

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