Life-Cycle Approach to New Product Forecasting

By Morrison, Jeffrey S. | The Journal of Business Forecasting Methods & Systems, Summer 1995 | Go to article overview

Life-Cycle Approach to New Product Forecasting


Morrison, Jeffrey S., The Journal of Business Forecasting Methods & Systems


Sometimes modeling the demand for a new product or service needs to account for phases of the product life cycle: Introduction, Growth, and Maturity. The Introduction Phase is often characterized by slower growth because not enough advertising budget is allocated, distribution channels are not well established and people who sell the product are not yet fully trained. It is also impacted by the amount of pent-up demand already existing in the market. Other things being equal, the lower the pent-up demand, the slower will be the introduction phase. 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 that the market 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. Here we will describe how to use the life-cycle approach to new product forecasting when there is no historical data.

When a truly new product is introduced, there exists no 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 a lack of consensus among individuals generating the forecasts. Penetration levels may vary across geographic regions simply because the primary assumptions have not been adequately identified and standardized. Forecasts, using the life-cycle approach, can be prepared by answering three basic questions:

1. What is the maximum level of saturation?

2. What is the inflection point or half life of the product?

3. What is the delay factor (time spent in Introduction)?

The Maximum Level of Saturation: is the maximum number of units your firm can sell of a product at some distant point in time. This kind of information can usually be obtained from intent to purchase surveys along with primary market research. It is simply the maximum number of units the market will bear for your company's product. For example, let's say your firm is marketing a new type of golf ball designed to travel 20% further than any ball on the market. Industry research shows that there are about 100,000 active players in your sales territory buying an average of three dozen golf balls a year. That puts the market demand for golf balls at 3,600,000. Your company sends out an intent to purchase survey. The result indicates that your new ball can capture 16.67% (about 600,000) of the overall market at some point in the future. If we assume no growth in the golf ball market, then the long run saturation level would be estimated at 600,000 balls per year or 50,000 per month. Chart 1 depicts how different long run saturation values change the shape of the S-curve. (Chart 1 omitted)

The Inflection Point 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. It is assumed at this point in time sales will reach 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. In our golf ball example, let's say the inflection point is expected at month 30 or exactly two and a half years after the product is introduced. This implies the level of sales at the end of month 30 will be 25,000 or one half the long run saturation level of 50,000. A greater inflection point of 40 implies that the 25,000 unit sales will not be reached until 40 months after the product is introduced. Likewise, an inflection point of 20 implies the half life of the product will be reached as soon as 20 months. …

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