1 using bass diffusion models to estimate product-specific net-to-gross ratios for market...

1

Using Bass Diffusion Models To Estimate Product-Specific Net-To-Gross Ratios for Market Transformation Programs

November 13, 2014

Residential PLA Program

2

Today’s Agenda

• RPP Program Overview and Market Transformation Review

• Review of Bass Diffusion Models

• Applying the Bass Model to Air Cleaners

• Caveats


3

RPP Program Review

• Program Approach:‒ Utilize retailer engagement to increase the demand and supply of more energy

efficient appliance and consumer electronic products

• Measures: ‒ RPP offers a portfolio of consumer energy efficiency measures that are delivered

through the retail channel partners

• Incentive Structure:‒ Incentives are paid to participating retailers for each program-qualified product sold.

• Evaluation Framework:‒ While this mid-stream program is primarily a market transformation program, it

contains elements of a resource acquisition program.


4

Market Transformation (MT) Review

• MT produces long-lasting, sustainable changes in the structure or functioning of a market achieved by reducing barriers to the adoption of energy efficiency measures to the point where continuation of the same publicly funded intervention is no longer appropriate in that specific market. (Prahl and Keating, 2014)

• Strategic MT is a program approach that uses ‘the tools of market transformation to make a deliberate and rigorous effort to intervene in [targeted], clearly defined markets.’ Strategic MT programs are expected to have market-transforming effects. (Prahl and Keating 2014)‒ This views MT as a proactive effort, not an aspirational outcome.

‒ Transforming markets can be hard –it may not work

‒ Not all markets can be transformed and not all acquisition programs will transform markets.

‒ Acquisition programs can support and be part of a strategic intervention.

‒ A strategic effort must be informed and focused to be actionable – and, frankly, evaluable.

‒ History has shown powerful examples of success


5Program-Level Conceptualization of Net Savings

Total Savngs

Naturally Occurring Outside Program Savings (Total Savings minus Spillover and

Within Program Savings)

Non-Free Riding Program Participation(Within Program minus

Free Riding ProgramParticipation

Naturally Occurring Savings (also called

Baseline or Counterfactual)

Program-InducedSavings

Within ProgramSavings

Free Riding Program Participation

(Naturally OccurringInside Program

Strategic MarketTransformation

Spillover

Market Effects

Market Transformation

Strategic Market Transformation

Participating Retailers MWh

Total Program MWH

Nonparticipating Retailers MWh


6

Today’s Agenda



• Product Example: Air Cleaners

• Caveats


7A Traditional S-Shaped Diffusion of Innovation Curve

http://upload.wikimedia.org/wikipedia/commons/1/11/Diffusion_of_ideas.svg


8The Bass Model and Two Types of Adopters

• Innovators:‒ Adopt new products independent of the actions of others

‒ Their adoption rate is represented as ‘p’, or the “coefficient of innovation.”

• Imitators‒ Their adoption is influenced by the adoption rate of others ‒ Their adoption rate is represented as ‘q’, or the “coefficient of imitation.”

• Defining the Innovator – Imitator Relationship: ‒ Imitator first-time adoption rate is a linear function of the number of previous adopters.‒ Actual number of adopters limited by total market size, represented by m in the model.


9

The Extended Bass Model

p q P A B p q P A B

Participating Retailer

Nonparticipating Retailer

With Without

• The basic Bass model has been extended to include price, advertising and assortment and associated elasticities.

• The extended model considers the role of price, advertising, assortment and consumer behavior (via p and q) as well as retailer behavior in product adoption.

• Provides a structured environment within which to systematically conduct sensitivity analysis using Monte Carlo simulations in order to converge on plausible NTGRs.


10

NTGR Calculation

With Scenario Savings for

Participating Retailers

Without Scenario Savings for


Net Savings Participating

Retailers

With Scenario Savings for

Nonparticipating Retailers

Without Scenario Savings for

Nonparticipating Retailers

Net Savings Nonparticipating

Retailers

Total Net Program Savings

Total Gross Savings for


NTGR


11

Model Focus

• This approach focuses on estimating retailer share of program-qualified models over time (rather than total volume).

• Program success based on increasing the share of program qualified products sold.

• The focus is on participating retailers with the expectation that non-participating retailers will, over time, be affected through causal mechanisms identified in the program theory and logic model.


12

Extended Bass Diffusion Model

Nt = p P-eM Bg + (1+q – p)Nt-1 – (q/Af P-eM Bg)Nt-1 2 Af

Where

p= Coefficient of innovation (i.e.,external influence)

q= Coefficient of imitation (i.e., internal influence)

M= Total potential ratio of sales of energy-efficient products to total sales

N0= Percentage of energy-efficient products sold at time 0.

P0= Ratio of price for energy-efficient product to price for standard product at time 0

e= Coefficient of sensitivity (elasticity) for price term

A 0= Ratio of advertising expenditure with the program to without the program at time 0

f= Coefficient of sensitivity (elasticity) for advertising B0= Ratio of energy-efficient assortment with the program to without the program at time 0 g= Coefficient of sensitivity (elasticity) for assortment


13

Today’s Agenda




• Caveats


14

Product Example: Air Cleaners

•Technology Characteristics:‒UES: 120 kWh/yr.

‒EUL: 7 years

‒Incremental Cost: $18

• Market Characteristics:‒634,000 households with products in PG&E territory (~12% saturation).

‒90,500 in annual sales

‒23,000 sales from participating retailers (25% of total).

‒2,300 of these sales are program qualified (~10%).


15Without Scenarios: Participating and Nonparticipating Retailers

• Represents the base case, i.e., business as usual

Parameter Without Analog/Source

p: 0.000000044

Room air conditioner (Jiang, Zhengrui, Frank Bass and Portia Isaacson Bass. "Virtual Bass Model and the left-hand data-truncation bias in diffusion of innovation studies." International Journal of Research in Marketing 23 (2006) 93–106. URL: http://www.bus.iastate.edu/zjiang/research/vbm_ijrm.pdf)

q: 0.5701

Room air conditioner (Jiang, Zhengrui, Frank Bass and Portia Isaacson Bass. "Virtual Bass Model and the left-hand data-truncation bias in diffusion of innovation studies." International Journal of Research in Marketing 23 (2006) 93–106. URL: http://www.bus.iastate.edu/zjiang/research/vbm_ijrm.pdf)

M: 0.5 Program Design & Theory

N0: 0.1 Residential Solutions Workbook (http://www.calmac.org/results.asp?t=2)

P0: 1.10 Assumed Incremental Cost

e: 0.10Typical short-term price elasticity (Economics: Private and Public Choice, James D. Gwartney and Richard L. Stroup, eighth edition 1997, seventh edition 1995.

r: 0.01

Desroches, Louis-Benoit. (2013). Trends in the cost of efficiency for appliances and consumer electronics . Presented at eceee 2013 Summer Study on energy efficiency, France, June 3-8, 2013 (http://www.escholarship.org/uc/item/6cv286q0) and expert judgement

A0: 1.00 Program Design & Theory

f: 0.425 20111006_BuR_Adv.Elasticities_WebApp1_Advertising Elasticity Database_AED.xlsx, cell O380

v: 0.00 Program Design & Theory

B0: 1.00 Program Design & Theory

g: 0.21 Eisend, Martin, "Shelf space elasticity: A meta-analysis", Journal of Retailing 90 (2, 2014) p. 175


16With Scenario: Participating Retailers

• Builds on Without scenario which represents business as usual

Parameter With Source

p: 0.019999956

Room air conditioner (Jiang, Zhengrui, Frank Bass and Portia Isaacson Bass. "Virtual Bass Model and the left-hand data-truncation bias in diffusion of innovation studies." International Journal of Research in Marketing 23 (2006) 93–106. URL: http://www.bus.iastate.edu/zjiang/research/vbm_ijrm.pdf) & Program Design & Theory

q: 0.1299



N0: 0 Residential Solutions Workbook (http://www.calmac.org/results.asp?t=2) & Program Design and Theory

P0: 0 Assumed Incremental Cost

e: 0Typical short-term price elasticity (Economics: Private and Public Choice, James D. Gwartney and Richard L. Stroup, eighth edition 1997, seventh edition 1995.

r: 0.025

Desroches, Louis-Benoit. (2013). Trends in the cost of efficiency for appliances and consumer electronics . Presented at eceee 2013 Summer Study on energy efficiency, France, June 3-8, 2013 (http://www.escholarship.org/uc/item/6cv286q0) and expert judgement & Program Design


f: 020111006_BuR_Adv.Elasticities_WebApp1_Advertising Elasticity Database_AED.xlsx, cell O380 & Program Design and Theory



g: 0 Eisend, Martin, "Shelf space elasticity: A meta-analysis", Journal of Retailing 90 (2, 2014) p. 175


17With Scenario: Nonparticipating Retailers

• Builds on Without scenario which represents business as usual

Parameter With Source

p: 0.009999956


q: 0.0799



N0: 0 Residential Solutions Workbook (http://www.calmac.org/results.asp?t=2) & Program Design and Theory

P0: 0 Assumed Incremental Cost

e: 0Typical short-term price elasticity (Economics: Private and Public Choice, James D. Gwartney and Richard L. Stroup, eighth edition 1997, seventh edition 1995.

r: 0.025

Desroches, Louis-Benoit. (2013). Trends in the cost of efficiency for appliances and consumer electronics . Presented at eceee 2013 Summer Study on energy efficiency, France, June 3-8, 2013 (http://www.escholarship.org/uc/item/6cv286q0) and expert judgement & Program Design and Theory


f: 020111006_BuR_Adv.Elasticities_WebApp1_Advertising Elasticity Database_AED.xlsx, cell O380 & Program Design and Theory



g: 0 Eisend, Martin, "Shelf space elasticity: A meta-analysis", Journal of Retailing 90 (2, 2014) p. 175


18Air Cleaner: Participating Retailers With & Without Program

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Reta

iler S

hare

Years

Without

With


19NTGR, Sales, Benefits and Lifecycle Savings

• Net-To-Gross Ratio:

• Total Net Sales: 306,000

• Total NPV Benefits: $4,545,000

Source MWhTotal Net Market Lifecycle Savings 159,561 Total Net Direct Program Lifecycle Savings 97,193 Total Net Program Lifecycle Savings 256,754 Total Gross Program Lifecycle Savings 277,259 NTGR 0.93


20Program-Level Conceptualization of Net Savings

Total Savngs

Naturally Occurring Outside Program Savings (Total Savings minus Spillover and

Within Program Savings)

Non-Free Riding Program Participation(Within Program minus

Free Riding ProgramParticipation

Naturally Occurring Savings (also called

Baseline or Counterfactual)

Program-InducedSavings

Within ProgramSavings

Free Riding Program Participation

(Naturally OccurringInside Program

Strategic MarketTransformation

Spillover

Market Effects

Market Transformation

Strategic Market Transformation

97,193 MWH

256,754 MWH

159,561 MWH

Source MWhTotal Net Market Lifecycle Savings 159,561 Total Net Direct Program Lifecycle Savings 97,193 Total Net Program Lifecycle Savings 256,754 Total Gross Program Lifecycle Savings 277,259 NTGR 0.93


21

Today’s Agenda




• Caveats


22

Caveats: Forecasting Is Inherently Uncertain

• We plan to periodically revisit model assumptions

• Incorporate new data as it is available

• Adjust model as appropriate


23

Risk Management

Ó Martin Joseph and Alec Finney, AstraZeneca

From forecasts to informed decisions……

Most Likely

ForecastUncertaint

y

Assess Risk

Plan & Accept Risk

Monitor

Assumptions

Quality

Behavior


24

Next Steps

• Incorporating Cal TF member feedback into NTGR methodology.oWould you like any additional information about the proposed estimation

approaches?

oDo you have any changes you would recommend to our proposed methods?

• Application of the NTGR method to all RPP product categories to incorporate into a Cal TF work paper.

1 using bass diffusion models to estimate product-specific net-to-gross ratios for market...

Documents

residential pla program

programqualified product

resource acquisition

midstream program

market transformation

specific market

tools of market transformation

extended bass model