Diffusion of Innovation and Estimating Market Size

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Diffusion of Innovationand Estimating Market Size

• Dr. Jon D. Pratt
• Innovative Venture Research (IVR)
• Center for Entrepreneurship I.T.
• Louisiana Tech University

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BAM

• Brainstorm
• Assess
• Measure

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Everett Rogers, 1962 defined Innovation -An
idea, practice, or object perceived as new we
define it as commercialized invention

• Rogers carefully studied new innovations in
• Hybrid corn, Television, Manufacturing and
• Medicine
• Concluded that New ideas tend to follow a
  pattern in entering diffusing into society.

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• Rogers said that the speed of adoption depends on
  the 5 characteristics of the innovation
• Relative advantage extent it is viewed as
  better than the idea it supercedes.
• Compatibility extent it is perceived as
  consistent with the existing values, past
  experiences, and needs of potential adopters.
• Complexity extent it is perceived as difficult
  to understand and use.
• Trial-ability degree it may be experimented
  with on a limited basis (low cost, free trial
  offer).
• Observe-ability extent to which results of an
  innovation are visible to others, who imitate.
• (Rogers. 2003  p.12-16)

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Remember Rogers Adopter Categories
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Cumulative Adoption Curve The integral of the
previous bell curveThe S Curve of innovation
diffusion
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Number of Years to Reach 50 Percent Penetration
of U.S. Households

• Technology
  Years
• Newspapers 100
• Telephone 70
• Phonograph 55
• Cable Television 39
  
• Personal Computer 17
  
• Color Television 17
• VCR
  10
• Radio
  9
• Black White Television 8
• 
  Source Electronic Industry Association U.S.
  Dept of Commerce

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Examples of S-curves in earning per share
Microsoft Xerox
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Designing the product so it is adopted quickly

• Knowing the characteristics of the innovation
  that affect how fast Innovators ( imitators)
  adopt it helps us to DESIGN the product so that
  it will be adopted faster by the general market.
  
• For example, we can design it to be more
  compatible, less complex, etc or we can design
  the offering to the customer so the benefits are
  easy for all to see and try-able by providing
  for (say) leasing instead of buying, etc.

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Market Size and share
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Estimating Market Size

• Suppose you have a product whose sales will
  depend on the number of cats in the US
• Or, perhaps, on the amount of
• cat food sold in the US

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This is NOT an exact science!

• Key word is estimate ----
• or 10 or 20
• Not to the 3rd decimal place
• WHY do you not need a highly accurate number?
  Because if its that close you dont want to be in
  the market

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Method for Estimating Market Size

• The Process is Decompose in to smaller pieces,
  then Build those pieces back up
• Heres three smaller pieces for market size
• market size (dollars per year) number of
  customers per year x
• 
  quantity purchased per customer x
• 
  price per unit

Estimating the number of customers The Cat
problem
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Lets Put it All Together!!!

• Assumption 1 There are 1.8 cats per housesold
• Assumption 2 We will sell one unit per 2500 in
  sales of pet food.

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What about the assumptions?

• Assumptions can be
• on the mark OR
• way off.
• Do Sensitivity Analysis and find more data
• Assumption 1 off the mark????
• (but other assumptions may help mitigate.)

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• Sensitivity Analysis is
• changing the numbers and seeing how much of a
• change you get in the final result
• used to see if the assumption is really critical
  or not
• used to see which assumptions need
• more data / quantification research

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Total Addressable Market - TAM

• Example - TAM for a new Japanese restaurant
• NOT 50 billion spent each year by Americans who
  eat out.
• NOT 5 Billion spent on ethnic food in US.
• 1 million spent on Japanese food within 50 miles
  of the prospective location

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Market share Top-Down vs. Bottom-up

• Top down - Do this only if you
• do bottom down too
• Example selling something in china
• 1.3 billion people
• 10 want a new one each year
• Total addressable market, TAM 130 million units
  per year
• Heres a tenuous idea It will be easy to get 1
  of the market, so we can sell 1.3 million
  units!!!!!

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Top-Down vs. Bottom-up

• Bottom-up DO This!
• I have 200 salesmen (or stores)
• Each makes 10 contacts per day
• 250 days per year
• 10 will be closed
• 200x10x250x.10 200,000 sales per year

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Questions?
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• Questions?