Sales Forecasting in High-Technology Markets: A Utility-Based Approach

Abstract

Accurate sales projections are of vital importance to the profitability and long-term survival of high-tech companies. This is especially true in the growth stage of product innovation, because major investments and marketing decisions are made in this phase. By examining recent empirical studies focusing on consumer behavior in high-technology markets, several factors are identified that can affect individual buying decisions and aggregate sales, namely, interpersonal communication, democratization of innovation, direct and indirect network effects, forward-looking behavior, and consumer heterogeneity. Against this background the diffusion-modeling and the utility-based approach are reviewed in terms of their basic conception and their applicability to the markets concerned. Based on this investigation a sales forecasting model for high-tech products, specifically in the growth stage, is developed. The model has a utility-theoretic background and a logistic structure. Since data are scarce in this early stage of the product life cycle two versions of the new approach are discussed, an extended version considering forward-looking behavior and a more parsimonious (myopic'') one. The performance of the new model is demonstrated using real sales data on the CD player, the DVD player/recorder, and the digital camera market. The empirical comparisons include alternative specifications of the Bass diffusion model as well as a proportional hazard model and consist of two steps. First, the models are checked as to whether they are able to represent the sales data at all. It is shown that both versions of the proposed model are at least equivalent, if not superior, to the models used as benchmarks in terms of fit. In the next step, the models are applied to predict future sales in the three markets. The resulting forecasts show that the proposed model performs significantly better than its benchmarks. Its parsimony enables reliable predictions, even in cases, where only short time series are available for parameter estimation. The model is able to anticipate decreasing diffusion rates as they occur at the end of the growth stage and, thus, helps to avoid overoptimistic sales forecasts, which may cause severe economic damages. The new approach is easy to calibrate and can be applied without specialized econometric expertise.