Functional Regression: A New Model for Predicting Market Penetration of New Products

Abstract

The Bass model has been a standard for analyzing and predicting the market penetration of new products. We demonstrate the insights to be gained and predictive performance of functional data analysis (FDA), a new class of nonparametric techniques that has shown impressive results within the statistics community, on the market penetration of 760 categories drawn from 21 products and 70 countries. We propose a new model called Functional Regression and compare its performance to several models, including the Classic Bass model, Estimated Means, Last Observation Projection, a Meta-Bass model, and an Augmented Meta-Bass model for predicting eight aspects of market penetration. Results (a) validate the logic of FDA in integrating information across categories, (b) show that Augmented Functional Regression is superior to the above models, and (c) product-specific effects are more important than country-specific effects when predicting penetration of an evolving new product.

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