Tuesday, November 20, 2012

Segment Dynamics over New Product Growth: A Gaussian Mixture Model with Latent Growth
INSEAD Working Paper 2012/115/MKT

New product introduction strategies are based primarily on analysis of potential market segments and the dynamics of these segments over the growth phase of the product. In aggregate, segment dynamics determine the market evolution of a new product. Adoption rate and overall market size are determined by growth of individual segments and changes to customers‘ perceptions of the new product‘s attributes. Despite the fundamental importance of these segment dynamics, the literature provides relatively little formalized knowledge about the market evolution for new products. Moreover, the two aspects of this evolution, changes in customer perceptions and changes in segment sizes, are not independent. For example, segmentation based on price elasticity may indicate a small size for the price sensitive segment early on but this becomes the major segment at a later point in the product life cycle. The objective of this paper is to propose a model that simultaneously captures: (1) within-segment perception dynamics and (2) segment size dynamics. To illustrate the benefits of the proposed model, we estimate the dynamics of internet shopping as an innovation over a nine-year period. This example illustrates the importance of distinguishing between growth due to changes in perceived attributes and those due to changes in the segment sizes.