Bassdiffmodel

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STRATEGIC MANAGEMENT DYNAMICS
Kim Warren
Figure 4.10 Exercise: The Bass Diffusion Model of
market development
Exploring how a population of potential customers is developed by the
combined effects of advertising and word-of-mouth.
This exercise supports part of Figure 4.10 in chapter 4 of the textbook ‘Strategic Management Dynamics’ by Kim Warren,
from J Wiley & Sons, 2008. www.wiley.com/go/smd. See www.strategydynamics.com/smdresources for the related course.
NOTE:
This slide show has no audio – the call-outs explain each point.
Use the Pause button and slider in your viewer to suit your reading speed and
move to different points in the presentation.
© Copyright Kim Warren, 2008. All rights reserved.
The model …
The model to which these instructions refer - ‘Fig 4.10 Bass Diffusion Model.msf’ – can
be found at www.strategydynamics.com/smdresources/chapter4.asp.
The model requires the mystrategy™ software – a Reader version can be downloaded
from www.strategydynamics.com/msi
The model can be run with the Reader version, but results cannot be saved
Instructions on fully licensing the software can be found in its Help menu
Getting started:
Install mystrategy
Open the model
Read the following pages before working with the model
™ ‘mystrategy’ is a registered trade mark of Global Strategy Dynamics Ltd.
© Copyright Kim Warren, 2008. All rights reserved.
How a population of potential customers is developed by the combined
effects of advertising and word-of-mouth
This figure [4.10 from chapter 4] shows how customers in a market develop through what is known as
“S-shaped growth”, because the chart of active customers looks like an elongated “S.” Initially,
advertising is the only factor driving the customer win rate. As potential customers are used up,
advertising is not able to sustain a high win-rate, but potential customers are also made aware of the
product by contact with active customers. While the active customer base is growing fast and the
potential is still large, this word-of-mouth effect wins customers increasingly fast. Eventually,, so few
potential customers remain that this rate also declines. The word-of-mouth win rate also starts to
decline, along with the advertising-driven win rate, and market growth slows and stops.
This is the number of people who
might want the product, but do
not yet own or buy it.
See pages 185-189 of Strategic Management
Dynamics for detailed explanation.
© Copyright Kim Warren, 2008. All rights reserved.
This is the number of people who
own or buy the product.
For a durable product each month’s
sales reflect the flow-rate of total new
customers per month.
For a consumable product, active
customers drive continuing sales also.
[Sales are not reported in this Figure]
Running the model …
Charts display the sources
number
of new
potential
customers,
and active
the
customers,
number
of potential
the customer
and
win-rate,
active
customers,
and total and
sales
total
each month.
customer
win-rate.
In this section at left, change the rate
of advertising spend and customers’
behaviour.
Click ‘’ to run all 36 months at once
or ‘| ’ to step through one year on
each click.
You must stop the model ‘’ before
you can make any changes.
© Copyright Kim Warren, 2008. All rights reserved.
Current values for each
variable are also
displayed whenever the
model is paused.
This chart displays the monthly profit,
reflecting the product’s sales and a
range of other assumptions.
Managing the number of customers won and lost …
This variable and its small time-chart
controls the rate of advertising spend each
month over the 36 months of the product
launch.
This variable sets the fraction of
customers seeing your advertising who
start buying the product. [set this only a
the start of the simulation]
This variable sets the fraction of
contacts between active and potential
customers that results in the winning of
a new customer. [set this only a the
start of the simulation]
See next pages for how to change the
values of these variables.
© Copyright Kim Warren, 2008. All rights reserved.
Changing the monthly advertising spend …
1. Double-click the variable
‘ADVERTISING SPEND $000 per
month’ ... the ‘Element Set-Up’
window will appear.
2. Select the Graph tab [do not enter any
values in the Equations tab, or the graph’s
values will be ignored]
Do not change the vertical axis – the
model is configured to work within
the range shown.
3. Enter values in the cells for the
monthly advertising spend during each
6-month period.
Optionally, you can vary advertising more
frequently – click the ‘Time Interval’ button.
5. Click ‘OK’ to confirm
your changes
4. … alternatively, drag the mouse across
the chart area – the values in the cells at
left will change to reflect this red line
© Copyright Kim Warren, 2008. All rights reserved.
Changing either the fraction of potential customers responding to
advertising, or the fraction of contacts between active and potential
customers that result in a new customer being won.
1. Double-click the constant ‘Fraction
responding to advertising per month’ ... the
‘Element Set-Up’ window will appear.
2. Select the Equation tab
3. Enter a new value in the Equation: box for the fraction
of people seeing your advertising that become
customers.
Although this value can be changed whenever the model is
paused, it reflects a behaviour that may not change much
during a product launch. So, set the value before running the
simulation, and leave it unchanged while it runs the 36
months.
Follow the same procedure to change the fraction of
contacts between potential and active customers that
result in a new customer being won..
© Copyright Kim Warren, 2008. All rights reserved.
4. Click ‘OK’ to confirm
your changes
Comparing different scenarios
There are two copies of the underlying model. One
version runs the base-case values, the other
version runs with the values you choose for
advertising spend.
In this case, advertising spend was raised during
the first three 6-month periods, then later reduced.
Black lines show base-case values.
Green lines show the results of
running with changes you make to
advertising spend.
This chart and the numbers displayed
alongside it show how the customer
win-rate is made up of [a] people won by
advertising, and [b] others won by wordof-mouth. No base-case values are
displayed on this chart.
Note that the current value of
each variable for your scenario is
also displayed.
© Copyright Kim Warren, 2008. All rights reserved.
Suggested investigations …
Estimate the answers to the following questions before running the simulation
to confirm the result. [It is not possible to calculate the answers exactly]. The
planning sheet and the screen-shot of the base-case scenario on the next pages
will be helpful for some of questions.
1.
What constant rate of advertising spend produces the highest rate of profit by
month 36?
2.
What is the earliest month the product becomes profitable if you spend a
constant amount on advertising over the 3 years of [a] $100,000, [b] $200,000,
[c] $300,000, and so on? What final rate of profit is achieved in each case?
3.
You are given a total advertising budget over the 3 years of $20 million. How
should that budget best be split over the 36 months to achieve [a] the earliest
profit, and [b] the highest final profit?
4.
You have been brought in after 12 months of a disappointing product launch, in
which previous management spent just $200,000 per month. [Set advertising for
the first two 6-month periods to 200]. You have been asked to make the product
generate $0.5million per month throughout the third year. How much advertising
budget should you ask for in year 2, in order to hit this target?
© Copyright Kim Warren, 2008. All rights reserved.
Planning sheet for advertising spend plans
Months:
Spend per month Total spend during
$,000
6-month period
1-6
7-12
13-18
19-24
25-30
31-36
Total
© Copyright Kim Warren, 2008. All rights reserved.
Base-case scenario – sketch estimated outcomes for your
alternative advertising strategies on this sheet.
© Copyright Kim Warren, 2008. All rights reserved.
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