Product diffusion and sales modelling

As an econometrician developments like these are always amusing. Data mining always reveals
interesting things, and if companies want to figure out the costs and benefits of their marketing effort they need to do the number crunching.

from knowledge@wharton

Two Wharton researchers have developed a mathematical model that they say will allow companies, for the first time, to predict at what pace new products will gain acceptance in markets where purchasing decisions by knowledgeable, influential customers sway the buying habits of others.

Wharton marketing professor Christophe Van den Bulte and doctoral student Yogesh V. Joshi say their model can be put to use in industries as diverse as movies, music, pharmaceuticals and high-technology. It is possible the model may also be a way to identify directors and actors who are ready to make the leap from small films to the Hollywood mainstream, they add....

Marketers have long tried to deepen their understanding of how new products gain acceptance among customers, a process known as product diffusion. Companies are especially interested in diffusion in markets that consist of two segments: "influentials" (knowledgeable people who keep abreast of product innovations and readily accept them) and "imitators" (people whose purchasing decisions are swayed by their savvier counterparts). Targeting influential prospects who are more in touch with new developments than most people and converting them into customers, the thinking goes, allows companies to benefit from a "social multiplier" or "social contagion" effect in marketing campaigns.
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Van den Bulte and Joshi confirm Moore's findings that there can indeed be a drop in sales of a new product between the time it is introduced and bought by influentials to its diffusion among imitators. But in contrast to what Moore claims, the Wharton paper says that "it need not always be necessary for firms to change their product to gain traction among later adopters and [for] the adoption curve to swing up again."

Another important insight is that the proportion of adoptions stemming from influentials need not decrease at a steady pace but may first decrease and then increase. The management implication is that, while it may make sense for a company to shift the focus of its marketing efforts from independent-minded influentials to imitators shortly after launch, it may want to revert its focus back to independents later in the process. "Frankly, we were surprised by this mathematical result. It seems counterintuitive at first and flies in the face of the current consensus taught in most business schools," says Van den Bulte. However, the paper not only explains why this can happen, but also backs up the claim with actual data on adoptions of a new drug from a study originally sponsored by Pfizer.

That insight has important implications for targeting and resource allocation. "Managers who confuse the distinction between influentials and imitators with that between early and late adopters -- and ignore our results and others' empirical evidence that the bulk of the late adoptions may stem from people not subject to social contagion -- may end up wasting money by poor targeting," the Wharton researchers write.