The Bass Diffusion Model

1. 1 The Bass Diffusion Model

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3. 3 EBay is a good example because there is clear diffusion�the more people access the site, the more attractive it is.EBay is a good example because there is clear diffusion�the more people access the site, the more attractive it is.

4. 4 Sales over Time

5. 5 Adoption Probability over Time

6. 6 Sales Diffusion Model for Durables St = p x Remaining + q x Adopters x  Potential Remaining Potential Innovation Imitation Effect Effect

7. 7 Assumptions of Bass Model Binary diffusion process (adopt now or wait to adopt). No repeat purchase, nor replacement purchase. Constant maximum potential number of buyers (N). Eventually, everybody will adopt.

8. 8 Details of Bass Model Capture the likelihood that a potential consumer will purchase a new product at a particular time t, given that she has not yet purchased the product until then. Formulation: L(t): likelihood of purchase at t, given that consumer has not purchased until t f(t): 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)

9. 9 Details of Bass Model (cont�d)

10. 10 Details of Bass Model (cont�d)

11. 11 Estimating Bass Model Parameters

12. 12 Parameters of Bass Model

13. 13 Forecasting Sales Using Bass Model

14. 14 Obtaining Model Parameters Estimation using past sales data: Regression Specialized nonlinear estimation Estimation using analogous products or judgments Select analogous products based on the similarity in factors affecting adoption (environmental context, market structure, buyer behavior, marketing strategies, etc.)

15. 15 Factors Affecting Speed of Diffusion Product related factors (p?): Relative advantage over existing products Degree of compatibility with existing approaches Complexity in use Risk involved: can be tried on a limited basis Visibility of benefits Market related factors (q?): Type of innovation adoption decision (e.g., does it involve switching from familiar alternatives?) Communication channels used Nature of �links� among market participants Effect of promotional efforts

16. 16 Assumptions of Basic Bass Model Binary diffusion process (adopt now or wait to adopt). No repeat purchase, nor replacement purchase. Constant maximum potential number of buyers (N). Eventually, everybody will adopt. Innovation is considered independent of substitutes. The impact of imitation is independent of time. The marketing strategies supporting the innovation are not explicitly included---Generalized Bass Model.

17. 17 Some Extensions (Generalized Bass) Varying market potential (N): As a function of reduction in uncertainty in product performance, growth in population, product price, and/or increases in retail outlets. Incorporation of marketing variables: e.g., coefficient of innovation (p) as a function of advertising p(t) = a + b ln A(t). Incorporating repeat purchases Multi-stage diffusion process: Awareness � Interest �Adoption � Word of mouth