Hi-Tech Market Adoption Modeling

Toshi Takeuchi

Financial projection for a completely new product● Financial projection is an integral part of any

business plan● If it is an existing line of business with

known trend, it is not too difficult to project the trend into future

● But if it is a completely new product or service with no equivalent to benchmark with, what do you do?

● Is linear trend good model to use?

Diffusion of Innovations● In "Crossing the Chasm", Geoffrey A. Moore

builds on the Diffusion of Innovations concept to define a market adoption model for hi-tech products

● The market adoption curve follows an S shape

● More suitable than linear models because○ it models the early slow adoption period○ it models the hypergrowth period○ it models the market saturation period

Linear vs. S curveComparison ● Problems with

Linear○ too aggressive in the

early period○ too conservative in

the hypergrowth period

● Linear is simpler to model, but S curve can be modeled as Logistic functionLinear model overstates

early period

Linear model understates hypergrowth period

Modeling Adoption in ExcelMarket penetration = Saturation/(1+Curve^((Hyper+Stable/2-t)/Stable))

Link to the spreadsheet

Used only for parameter estimation

Used only for parameter estimation

minimize this in Solver

Determines the penetration % at the start of hypergrowth.

● if 5%, set to 360● if 10%, set to 81● if 20%, set to 16

ExampleHypergrowth starts in Year 3 at 5% penetration, ends in Year 5

● Build this up with estimated market size

● Pricing model● Units sold/subscribed● etc.

And you have a financial projection for your business plan!

Parameter EstimationIf you have an actual data, you can use Solver in Excel to estimate parameters● Install Solver● In the Solver dialog: ● Set Target Cell: select the cell

for the sum of squared errors ● Equal To: Pick "Min" radio

button● By Changing Cells: select cells

for Saturation, Curve, Hyper, Stable (or subset)

● Click "Options" and check "Assume Non-Negative"

It is only as good as assumptions you makeIn reality, the actual adoption never follows the model faithfully● Use the model to develop assumptions and

test various scenarios to refine your assumptions and models

● it is a good idea to come up with a three-point estimation of the best case scenario, the worst case scenario and the most likely scenario.