The Bass Model & Forecasting Product Adoption (Part I)
Market Sizing & Analogous Products
In the previous post, we mentioned the difficulty of conducting market research for truly novel products and services. But what about those that can be compared with things that already exist? If years ago, you wanted to say introduce the iPod, a product that could, in some respects be compared with other portable music players, establishing market size wouldn’t be an entirely subjective a task. A quick literature search for the market size of analogous products such as portable radios, walkmans, and CD players, could have provided baseline figures.
The Bass Model
Beyond the support it lends to fund raising activities, defensible market size information is also and important business planning tool. Market size information is one of the key metrics used in “the Bass Model,” a highly cited model for forecasting the adoption of new products and services. Hey, if you are planning to sell a tangible good or even a subscription-based web service, you simply have to graph the adoption curve to project revenues and expenses, and to determine what resources will be needed.
In its simplest mathematical form the Bass Model is:
- S(t) = [p + (q/m) * N(t-1)] * [m - N(t-1)] = number of new customers in time period t
- m = the total market size in terms of number of people who adopt the service
- N(t-1) = the cumulative number of adopters from time period 1 through time period t-1
- p = “the coefficient of innovation” or the probability that an innovator will adopt the service at time period t
- q = “the coefficient of imitation” or the probability that a non-innovator will adopt the service as a result of word-of-mouth-marketing and other socially, non-advertising based communications.
The Bass Model gives rise to the S-shaped curve seen below:
Cool, Now We Can Forecast Right?
Not quite yet unfortunately. The shape of the graph is highly dependent on the variables p and q. A product with a low coefficient of innovation but high coefficient of imitation, will, for example, be adopted slowly while that with a high coefficient of innovation but low coefficient of imitation will penetrate the market much more rapidly. In addition, the model in its simplest form does not account for competition between firms that are hawking the same product, nor does it account for the impact of advertising and sales promotions. Thankfully, an extended version does. In Part II, we will discuss the proper selection of p and q, and extend the model to include both competitive forces and account for the use of advertising and sales promotions. So stay tuned and Happy Memorial Day!
References
[1] Frank M. Bass, “A New Product Growth Model for Consumer Durables,” Management Science 15:5 (1969): 215-227
[2] Elie Ofek, Peter Wickersham, “Forceasting the Adoption of a New Product,” HBS Case No. 9-505-062
[3] Wikipedia, “Bass Diffusion Model,” http://en.wikipedia.org/wiki/Bass_diffusion_model
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