Innovations: Demand Side Bass Diffusion Model

1. Innovations: Demand SideBass Diffusion Model • Describes the first purchase and diffusion of innovative new durables. • Postulates two distinct types of influences on potential consumers • The intrinsic desire to adopt an innovation: the innovation effect. • Consumer characteristics. • Marketing-mix activities. • The influence of social interactions (e.g., through word-of-mouth WOM) with consumers who have already bought: the imitation effect.

2. The Model • Let the potential market for a new innovation such as HDTV be Qand the number of consumers who have already bought the product at any time t be qt. • At any time t and for any given consumer in the population, let the probability of purchase be: • When qt consumers have already bought the product, then (Q - qt) have not yet purchased (i.e., this is the untapped market).

3. The Model • The expected sales at any time t are • In this i is the coefficient of innovation: • people who are not affected by how many others have adopted. • This effect is highest in the initial periods. • Captures the fact that early buyers are less affected by word-of-mouth (i.e., WOM). • c/Q measures the coefficient of imitation. • This effect increases with the number of people who have already adopted. • Later buyers are more influenced by WOM.

4. Sales Patterns Case 1: Innovation with strong innovation but weak imitation effect (i >> c/Q) 3000000 2500000 2000000 1500000 1000000 500000 0 0 Case 2: Innovation with weak innovation but strong imitation effect (c/Q >> i) 3000000 2500000 2000000 1500000 1000000 500000 0 0

5. Summary • The original model fits data quite well at the category level in numerous new product markets. • Given initial sales data it is a good tool to estimate • total market potential • peak of the innovation • Although it does not include marketing-mix variables, it can be used to provide input to marketers: • How to turn a case 1 situation to case 2. • Ignores the strategic effect of firm competition in shaping the product diffusion of innovations.

6. Sales and Profits ($) Sales Profits Time Growth Maturity Decline Product Development Stage Introduction Losses/ Investments ($) The Product Lifecycle

7. What Happens At Decline? • Four Strategies: The case of Nylon • Original Uses • Military parachutes, Ropes, Circular Knit conventional hosiery. • Usage Frequency • Hosiery: Pantyhose as a “social necessity.” • Varied Usage • Fashion Smartness and Variety • Tinted Hosiery, Patterned Hosiery • New Uses • Rugs and tire cords

8. Innovations in Technology Markets • Windows vs. Apple • VHS vs. Beta Formats • QWERTY vs. DVORAK • Does the superior technology have greater market share? • Why? • Network Externality

9. Network Externalities and Innovations Demand side problems • Suppose two competing technologies are launched. • One is established incumbent, there is a new technology. • existing consumers of the old technology (installed base) • new consumers who arrive over time. • Consumers have to anticipate which technology will be widely used by the competitors. • Leads to problems • excess inertia (users wait to adopt ). • excess momentum (consumers rush to an inferior technology in the fear of getting stranded). • How do you solve these problems?

10. Possible Solutions Inertia • communication between users (WOM) • time bound discounts to early users • offering converters • “targeting” the flow of new users. These users exert an externality on the old technology users. Excess momentum • preannouncing the new product to make consumers who are just about to buy wait. (Windows 95) • Introduce earlier regardless of some “bugs” but offer quality upgrades and high quality after sales support (Apple Newton, Pentium)

11. Supply-Side Problems • Two firms with incompatible products but which are substitutes • Lotus vs. Excel. • Consumer market has network effect. • Will any firm want to be compatible? • Which firm will initiate compatibility? • What kind of situations will make firms cooperate to be compatible? • How should compatibility be achieved?

12. Possible Answers • Smaller firm often has the greater incentive to be compatible. • The threat of new entry • More equal market shares implies greater cooperation