USING ADOPTION AND LIFE-CYCLE MODELS FOR BUSINESS PLANNING AND STRATEGY

INTRODUCTION

The Top-down User Base model is a market size estimation and forecasting approach which is applicable to many industries - Automotive, Aerospace, Capital Goods, Upstream Oil and Gas, Healthcare and Life-sciences, IT Hardware and Software, Telecommunications, Lighting, Furniture and Household Appliances.

The Adoption and Life-cycle Model has three main components:

1. Snapshot: Current Installed Base Estimation2. Adoption: Installed Base Projection3. Replacement: Estimation of Replacement-rate and Churn-rate

STAGE ONE: INSTALLED BASE ESTIMATION

The estimation of the installed base can be done using different methods. In many cases, the most accurate but also generally the most expensive is to use primary research – End-User Interviews so as to estimate the existing installed base.

In some cases, a viable alternative is to also conduct competitive interviews. The existing installed base can also be tracked via the so called Trade Associations, where all suppliers “pool” their internal tracking of their own installed base.

Another alternative is to use other secondary direct sources (e.g. national or international statistics).

Last, but not least, in many markets statistics on complementary products or human resources are also a viable alternative method for the estimation of the installed base (e.g. if we have information on the annual sales volume of ink cartridges and we know the average number of cartridges used per printer per annum, we can accurately estimate the printer installed base).

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USING ADOPTION AND LIFE-CYCLE MODELS FOR BUSINESS PLANNING AND STRATEGY

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USING ADOPTION AND LIFE-CYCLE MODELS FOR BUSINESS PLANNING AND STRATEGY

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STAGE TWO: INSTALLED BASE PROJECTION

After we have estimated the current installed base, in order to forecast the market volume, we need to look at the installed base projection.

For markets for existing established goods with sufficient historical data, the most accurate approach is to use statistical methods (e.g. time-series analysis). An alternative for new technologies or markets with lower data availability is to use technology models or top-down customer base usage models.

In both cases, the resulting estimations will show a picture of the installed base and its anticipated size into the future.

STAGE THREE: ESTIMATION OF REPLACEMENT RATE AND CHURN-RATE

Now that we already have a projection of the installed base in place, the missing ingredients to translate this into market volume in units are the replacement rate and churn rate.

The replacement-rate is relatively easy to calculate as it is equal to one divided by the product life. The length of the product life itself is a widely available metric in more mature industries and can be estimated using qualitative methods like expert/customer interviews in less mature industries.

The churn-rate is the other missing ingredient – it gives the share of drop-outs from the existing installed base. This could be due to customers simply discontinuing the use of the product but could also be due to a competitive technology.

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USING ADOPTION AND LIFE-CYCLE MODELS FOR BUSINESS PLANNING AND STRATEGY

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RESULT: CURRENT MARKET VOLUME AND FORECASTS SPLIT INTO NEW AND REPLACEMENT MARKET

Based on these assumptions, we can compute the total market volume, the replacement market volume, the new market volume as well as any potential market being diverted by a competitive technology.

This methodology not only serves as a successful market-sizing and business forecasting approach, but also gives additional insight into the composition of the market and can be used as a basis for marketing focus decisions – e.g. whether to focus marketing efforts on “replacement” customers or “new” customers.

GEMSEEK’S EXPERIENCE

GemSeek has used this methodology in conducting successful market sizing and business forecasting in various sectors, including capital goods and medical devices.

Can we help you? Contact us at:office@gemseek.com.

We will offer a free consultation and an inventory of the data sources available for your industry and markets.

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