Marketing Tool Kit

New Product
Forecasting:
The Bass Model

Background and Overview of the Model

Contents
The “Bass model” as it has come to be known is undoubtedly one of the  Background
most widely used, frequently referenced and thoroughly researched market-  Basics of the Model
ing models in the world. First published in 1969, the model has withstood
 Cross Section of Parameters
the test of time and technician who have added numerous “bells and whis-
 History of the Model
tles” designed to extend it, expand it, add more variables and more com-
plexity. Yet the basic three parameter model continues to deliver accurate  Tips on Using the Model

useful forecasts and insights for executive decision about innovations that  References
are opening new and emerging markets.  Additional Resources

“The Bass model is the most popular model in the field of marketing.”
Prof. Marnick Dekimpe Claims: The Bass Model...

 Is the most Popular, Widely

What is so unique about the model? It is amazingly versatile. It can repre- used, Frequently cited, Robust
model in marketing.
sent distinctly different patterns of adoption from slow growth “sleepers”
to instant hits ‘blockbuster.” Distinctly different products from state of the  Works with just three easily
interpretable parameters.
art consumer electronics to such common tools as the toaster and the hair
 Assumptions are soundly backed
dryer. And, distinctly different fields from medical breakthroughs like artifi-
by the diffusion research.
cial insemination and rural innovations as bale hay..
 Offers plausible forecasts of the
It is a predictive model that allows us to forecast future adoptions, even adoption rate of a new innova-
tion and provides a way to re-
when no data exists for our innovation. We can use the parameters from duce the uncertainty associated
the data base of products that had similar characteristics when they were with the introduction of a new
product in the marketplace.
adopted.
 The Basic Bass Model
“A New Product Growth Model for Consumer Durables,” Management Science, 1969

The model is built on two basic assumptions, that potential adopters of an innovation are influenced by two types of communication
channels. Broadcast media and interpersonal channels. Individuals adopting a new product because of what they see or hear from
mass media advertising messages occur continually, but peak early in the product life cycle. And individual adopting based on what
they see or hear from prior adopters. Bass specified the probability of adoption as a linear function of M the total potential mar-
ket, p the coefficient of innovation (external influence) and q the coefficient of imitation.

P(t) = p + q/M (N(t))

where N(t) is the cumulative number of customers w ho have already

adopted.

Some math leads to the basic equation for predicting sales at time t ,

n(t) = pM + (q-p) N(t) -q/M (N(t)) 2

With two or more pieces of data on sales an estimate of p & q can be

obtained.

There are 3 routes to a predictive model. Estimation of p, q and M

from historical sales data using 1. Ordinary Least Squares linear regres-
sion analysis,, 2. Using nonlinear optimization, or 3. Using analogous
product estimates of p & q.

Extensions of the basic model have been proposed to add the impact of marketing variables (the Generalized Bass Model), account
for repeat purchases of a product (Dodson & Muller), allow M, p and q to vary over time.

Bass Model Parameters from a

Cross Section of Categories
History of the Model
Cable TV .100 .060
Camcorder .044 .304 The model was devel-
oped for predicting sales
Cellular .008 .421
of durable goods (such
CD Player .157 .000 as stoves, refrigerators,
Radio .027 .435 dishwashers and air
conditioners. Products
Home PC .121 .281
that once adopted are
Hybrid Corn .000 .797 not repurchased for
Tractors .000 .234 many years. This en-
abled a simple represen-
Ultrasound .000 .534
tation of the adoption
Dishwasher .000 .179 process that has proven
Microwave .002 .357 to be very robust. It
works well because the
VCR .025 .603
assumptions in the Bass
Average .003 .380 model are soundly
based on the results of
diffusion research,”
Source: Marketing Engineering,
Everett Rogers, Diffusion
Revised Second Edition, by Lilien and of Innovations, 3rd Ed.
Rangaswamy has a more complete
list that is useful for estimating
adoption by using analogous product The model has been
used across a wide range of categories, for products and services. It has been used across coun-
parameter when no sales data is
tries and across cultures. Fortune 500 companies to start ups have used the model. I have
available. used the models forecasts to make decisions at AT&T and at a software start up called TeleSym.

2
 Tips for Using the Bass Model
Estimating M, Market Potential
It can be estimated with the model if early sales data is available. This is rarely the case. I have generally found it
worthwhile to estimate M independent of the model. In most cases management has a judgment, a strong intui-
tive feel, about the size of the market, even though it may be optimistic. If not this estimate can often be ob-
tained from analyst forecasts, marketing research, or guestimates that can be calibrated by testing the logic and
assumption behind the estimate (E.g. Using the Delphi Method). In some markets these estimates can be rather
precise. Pharmaceutical firms for example, often have rather precise estimates of the incidence of a disease or
ailment. It is often worthwhile to obtain an independent third party estimate to calibrate and minimize the risk of
bias and group think.

I have found it useful to treat M as a variable. Assuming a constant growth rate g, over the modeling time frame
has often produced a more accurate and believable forecast. This is an indirect way to reflect the growth that
occurs in market as the average price drops and the demand for the product/service expands. (Note: Bass, Krish-
nan & Jain insignificant results when trying to estimate g using sales data. If in doubt assume M is fixed.) It is also
probably best to treat M as fixed because numerous studies have shown the simple model to very flexible and
robust.

Estimating p & q
Most applications of the model are used to make plans and decisions before the product/service has been intro-
duced to the market. No sales data exists with which to estimate p or q. Managers do not have an intuitive esti-
mate of p and q. The practical approach is to use the coefficients estimated from the diffusion patterns of analo-
gous products. The average values across a wide range of products is p = .03 and q = .38. Industry specific data is
available for consumer electronics, appliances, medical equipment, pharmaceutical drugs, semiconductors , agri-
cultural equipment, etc. Lilien and Rangaswamy).

The best process in my experience, is to use analogues based on the similarities in expected market reactions
rather than the product category. For example, the adoption of satellite radio is more likely to be similar to cable
TV than the adoption of radio. The first generation of radio had no direct competition and was free. Satellite ra-
dio has adopted a subscription pricing model and faces a direct competitor. The same dynamics that cable TV
faced in converting consumers from free TV to cable service. If necessary, we can consider a weighted average of
p and q values across several categories. Or apply a Bayesian weighting that can be updated as new information is
collected.

Predicting My Sales
Most users are not as interested in industry sales as they are in their product/service sales. This often requires
two adjustments to the Bass model forecasts—an estimate of the addressable market and the firm’s share sales to
the addressable portion of the market.

The addressable market is that portion of M that the firm can serve with its current product offerings. For exam-
ple, the FDA may restrict the sale of a drug to children and women who are pregnant. But later formulations may
expand the addressable market to all patients suffering from an ailment the drug can treat.

It is often more difficult to estimate market share. This can be a subjective assessment based on management
judgment. Or it can be assessed using marketing research. In generating a quarterly or annual sales forecast, esti-
mates are required for each period.

. 3
Additional Resources

Wayne Winston show how to use References

Excel to estimate the model parame-
ters and use the model for forecast-
ing in his book Financial Models
Using Simulation and Optimization,
Newfield, NY. Palisade, 1998.
Bass, Frank, “A New Product Growth Model for Consumer
Durables,” Management Science, Vol. 15 (January
1969)
Bass, Krishnan & Jain, “Why The Bass Model Fits Without Deci-
sion Variables,” Management Science, 1994.

A good tutorial with accompanying
case study is in Lilien & Rangas-
wamy’s Marketing Engineering,
Revised Second Edition. Reading,
Mass. Addison-Wesley, 1998.
The model has also proved valuable
in predicting the adoption curves of
2nd, 3rd and successive generations
Dodson & Muller, “Models of New Product Advertising and
Word-of-Mouth.” Management Science, Nov. 1978.
Lawrence & Lawton, “Applications of Diffusion Models: Some
Empirical Results,” in New Product Forecasting, Eds.
Wind, Mahajan, & Cardozo (Lexington Books,, 19810
Libai, Muller & Peres, “The Diffusion of Services,” working
paper, 2007.
Mahajan, Muller & Bass, “New Product Growth Models in Marketing: A Review and Directions for
Research,” Journal of Marketing, 1990.

of technology. P and q are the same Norton & Bass, “Evolution of Technological Generations: The law of Capture,’ Sloan Management
for each generation in many cases. Review, 1992.

Norton & Bass. Norton & Bass, “A Diffusion Theory Model of Adoption and Substitution For Successive Generations of
High Technology Products,” Management Science, 1987

Marketing Tool Kit

The effectiveness of your marketing Notes:

effort can be improved by the use of
proven best practices. The
‘Marketing Tool Kit’ contains infor-
mation about ideas, models, and
techniques I have found useful in my
practice of marketing over the past
25 years.

Sample of Topics:

 Word of Mouth Marketing

 Customer Defined Attributes:

The Kano Model

 Linking Customer Preferences

to Engineering Design: QFD

For more information on how to

apply these tools to your application
contact;

Joe Dodson
UW School of Business
Joe_dodson@hotmail.com