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LIFE CYCLE APPROACH TO NEW PRODUCT FORECASTING
Sometimes, modeling the demand for a new product or service needs to account for phases of the product life cycle: Introduction, Growth, and Maturity. Advertising, deployment constraints, consumer acceptance, competition, and technological changes all have an impact. The Introduction Phase is often characterized by slower growth due to advertising, distribution, and training efforts being initially started up. It is also impacted by the amount of pent-up demand already existing in the market. The Growth Phase reflects the highest rate of consumer acceptance where the product is being purchased at its most rapid pace. The Maturity Phase implies the market's saturation level for the product has been reached and most potential buyers have already purchased. These phases of the product life cycle can generate an S-shaped market diffusion over time. The following discussion demonstrates a relatively simple way to incorporate market research and a set of standardized assumptions into the forecasting process for new products.

Output from S-curve models represent LONG TERM outlooks based upon rational insight or market research. Other methods such as Time Series models will often produce more accurate forecasts in the SHORT TERM. However, when long term projections are necessary and historical data is limited, these approaches provide an analytically sound framework with which to quantify market assumptions and product diffusion over the extended planning horizon.

When a truly new product is introduced, there exists a lack of historical data. Standard time series and regression models are impossible to use under these conditions. As a result, the forecast process is typically ad-hoc and distorted by lack of consistency across individuals generating the forecasts. Penetration levels may vary across geographic regions simply because the primary assumptions have not been adequately identified and standardized. For the same reasons, diffusion rates may lack consistency through embedded assumptions of pent- up demand, advertising, and deployment. The advantage of the following approach is that the forecaster is conditioned to quantify primary market assumptions in a standardize way. This is accomplished by answering three basic questions:

  • What is the Maximum Level of Penetration ?
  • What is the Inflection Point or Half Life of the Product ?
  • What is the Delay Factor ( reflecting the time spent in Introduction) ?

The Maximum Level of Penetration: is the long-run saturation level of your product or service. This kind of information can usually be obtained from intent to purchase surveys or primary market research. It is simply the maximum number of units the market will bear for your company's product. The graph to the right depicts how different saturation values change the shape of the S-curve.

The Inflection Point (Half-Life) of Product: represents that point in time where the product is selling at its fastest rate. After this point, the rate begins to diminish and forms the second half of the S-curve. Because of the mathematics of the forecast equation, this point in time will always occur when sales reaches exactly one-half of the long-run penetration level of the product. The lower the inflection point, the quicker the product is projected to reach half of its sales potential.

The Delay Factor: is the most subjective assumption of the process. Its value impacts the first part of the S-curve - describing how long the product is expected to remain in the Introductory phase of the product life cycle. This factor usually will fall between zero and one, depending on how soon the product is expected to reach its half-life. A factor close to zero implies that there is a substantial amount of pent-up demand in the market. In other words, as soon as the product is introduced, immediate sales are to be expected. If all other factors remain constant, increasing the delay factor could imply reduced advertising budgets or increased deployment problems. For products with a life cycle inflection of thirty months, a normal looking S-shaped curve might have a delay factor between around .1.


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