1. Principle of Innovation and Entrepreneurship
Charatpong Chotigavanich
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2. The Bass Model of Product Diffusion
Today
The Bass Model of Product Diffusion
How to predict the diffusion rate of new product.
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3. Remember Product Life Cycle?
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Source: New York Times

4. New Product Life Cycle Sales Profits Introduction Growth Maturity
Decline
Why does the profit fall below 0? Why still doing it?
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5. Strategies in Product Life Cycle
Sales
Profits
Introduction
Growth
Maturity
Decline
Create awareness
and trial
Maximize share,
grow market
Maximize profit,
fill pdt. lines
Harvest,
delete
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6. Innovator  Will try out product by themselves
Modeling the PLC
Potential Adopters Classified into 2 Groups
Innovators
Imitators
Innovator  Will try out product by themselves
Imitator  People who will start using the product after seeing others using it.
Total sales = Sales from Innovator + sales from imitators
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7. Modeling the PLC Key Assumptions Implication
Innovators are not influenced by others in the timing of their initial product purchase
Imitators are influenced by the number of previous buyers in the timing of their initial product purchase
Implication
The importance of innovators to product sales will be high at first but will diminish with time.
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8. Sales from innovators is estimated by:
Bass Model
Sales from innovators is estimated by:
A certain percentage “p” of the people who have not used the product before.
Sales from imitators is estimated by:
A certain percentage “q” of the people who are using the products of the people who have not used the products before.
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9. M is the initial total market size. S(t) is the new sales at time t.
Let’s Supposed…
M is the initial total market size.
S(t) is the new sales at time t.
C(t) is the total number of users at time t (cumulative sales).
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10. Sales from innovators is estimated by:
A certain percentage “p” of the people who have not used the product before.
Then: Sales from innovators at time t+1
p * [M – C(t) ]
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11. Sales from imitators is estimated by:
A certain percentage “q” of the people who are using the products of the people who have not used the products before.
Then: Sales from imitators at time t+1
q * C(t)/M * [M – C(t)]
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12. Combining both S(t+1) = p * [M – C(t) ] + q * C(t)/M * [M – C(t)]
Then, if we change to time t
S(t) = p * [M – C(t-1) ] + q * C(t-1)/M * [M – C(t-1)] Or
S(t) = [p + q*C(t-1)/M] * [M – C(t-1)]
Now, let’s do it in excel…
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13. Modeling the PLC See excel model Time (mth) Sales from innovator
Sales from imitator
New sales this period
Cumulative Sales 1 2 3
See excel model
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14. The flaw of this model… The flaw of this model
Does not take price into consideration.
p and q change over time.
What if there is a churn rate?
What if we take into account the population growth or decline?
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15. Where do you get p and q from? - Historical
Cluster
Product p q 1
Electric toothbrush
0.083
0.22
Fire extinguisher
Hair setter
Slow cooker
Styling dryer
Trash compactor 2
Calculator
0.0249
0.27
Digital watch 3
Can opener
0.0232
0.32
Curling iron
Electric blanket
Heating pad
Knife sharpener
Lawn mower 4
B&W TV
0.0141
0.48
Blender
Deep fryer
Elec. Cloth dryer
Microwave oven
Air conditioner 5
Color TV
0.002
0.54
Refrigerator
VCR
p ranges from near zero to as high as .30
Avg. p is 0.030
Industrial durables have lower p than consumer durables – Why?
q ranges from .3 to .9
avg. q is .4
industrial durables have higher q than consumer durables – Why?

16. Using the Model to Forecast
Wait until you have early sales data, and then use regression, OR work by analogy:
Select analogous products for which a fairly complete diffusion history is available
Obtain the diffusion model parameters for innovation and imitation for these products
Estimate market potential for the new innovation through management judgments or survey research
Conduct scenario analysis
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17. Power Lawnmowers

18. Clothes Drier

19. Forecast vs Actual
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20. Actions Influencing Innovation and Imitation
Marketing actions to insure:
Awareness - advertising, promotion
Accessibility - distribution, pricing
Satisfaction - product design and modification; service
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21. Factors Influencing Diffusion
Characteristics of Innovation (Roger’s ACCORD):
Relative Advantage
Compatibility with current behaviors
Complexity in communicating the benefits
Observability of the product’s benefits
Riskiness (What if the product fails?)
Divisibility (Sometimes called Trialability)
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22. Predicting the Success of a Brand: Trial and Repeat Models
These models define predictable patterns of sales based upon:
Target Population Size
Rate of Trial
Frequency of Purchase
Probability of Repurchase
These factors define the rate and level of sales at “maturity,” and the sales pattern leading to maturity
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23. General Reasons for New-Product Failure . . .
1. Market Segment Too Small 8. Forecasting Error
2. Poor Match with Company Capa- 9. Competitive Response bilities
3. Not Unique 10. Change in Customer Tastes
4. Lacks Superior Quality 11. Changes in Environment
5. Little Benefit Relative to Competition 12. Ineffective Launch
6. Poor Positioning 13. Insufficient Profitability
7. Inadequate Support from Channel 14. Organization Problems
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24. U.S. Common Test Markets
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25. The Bass Model assignment will be posted online.
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26. Question?
Question ?
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