Download Dr. Harry Cook

A Simple Model for Demand
and Product Management
H.E. Cook
Department of General Engineering
UIUC
The Question Addressed
Can a simple model of product demand
give both qualitative and quantitative
insight into managing the development
of new products?
Outline
1. The inter-connectivity between
customers, society, and the firm.
2. Fundamental & bottom-line metrics.
3. A simple market transaction.
4. Product demand: theory & experiment.
5. Marketing research for Product Value.
6. Conclusions.
Inter-connectivity Between
Firm, Customer, and Society
Societal
Needs
Customer
Needs
CashProfit
Flow
Demand
Environmental
Attributes
System
Attributes
Price
Societal
Value
Customer
Value
Cost
Society &
Manufacturer
Loop
Customer &
Manufacturer
Loop
Metric types:
Green=Fundamental
Blue= Bottom-line
B
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eu
rf
sa
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Quantitative Modeling
Simple Transaction
P-C
V-P
If buyer and seller bargain with equal strength, they arrive at a
price which allows them to share the free value created:
Price Agreed To = (Value + Cost)/2
Source: Cook, H. E. Product Management: Value, Quality, Cost, Price, Profit and
Organization. Kluwer Academic Publishers, Norwell, MA, 1997.
Fundamental Driving Forces
A reduction in free energy drives
transformations in the inanimate
world.
An increase in free value drives
transformations in animate world.
Demand Is Key Variable in
Terms of Constructing Model
Societal
Needs
Customer
Needs
CashProfit
Flow
Demand
Environmental
Attributes
System
Attributes
Price
Societal
Value
Customer
Value
Cost
Society &
Manufacturer
Loop
Customer &
Manufacturer
Loop
Taylor Expansion D=D(V,P) for N Competitors
(Discard Higher Order Terms)
N simultaneous equations


1
Di  K Vi  Pi   Vi  Pi 
N j i


Negative slope of
demand with price
NE2 D
K
P
Average value for segment
is approximately twice price
1  E2 
V  P
  2P
 E2 
Linear Demand Curve for a Monopoly
But you only need to focus on changes in demand and value!
Demand
V
0
V0
V0+V
Price
Fit of Linear Model to Demand Curve
8
7
Baseline demand D0
Demand
6
Baseline price P0
5
4
Linear approximation
3
M arginal value V0
2
1
0
0
2
4
6
Price
8
10
12
Value Change with Linear Model
10
Demand
8
Value
increase
6
4
2
0
0
2
4
6
Price
8
10
12
Test of Linear Model
Simulated Purchase of Two Lottery Tickets
Fraction selecting lottery ticket
0.3
50% chance
of winning $100
0.25
80% chance
of winning $100
0.2
0.15
0.1
Economic value
Economic value
0.05
0
$30
$40
$50
$60
$70
$80
$90
Price of lottery ticket
Source: Cook, H. E. and A. Wu, On the evaluation of goods and selection of the best
design alternative, Research in Engineering Design. 13. 42-54 (2001).
$100
Combining Logit and Linear Models
Di
 exp(U i  U )
D
Ui  U 
Logit model
 N  1 E2 Vi  Pi  V  P 
P
Vi  Pi 1 
  N  1 E2 
 
E2 
 P
Combined
model
S-Model Universal Metric for Product
Management
 V  C 
U
t
Agrees with findings, obtained from
comparative studies, that highly
successful companies lead in quality,
speed to market, and control of costs.
Using Historical Demand & Price Info
To Solve for Value over Time
Vi 
N  Di  DT 
K  N  1
 Pi
Value of Two Competing Minivans over Time
Value Trends for Mini-vans
$50,000
Market leader reacts:
drivers side 2nd door,
added interior room
$48,000
$46,000
Solve for value
from historical
demand and
price data.
Market leader: FWD,
car-like ride & handling
Value
$44,000
Challenger: RWD,
van-like ride & handling
Challenger moves to FWD,
car-like ride & handling
$42,000
$40,000
1991
1992
1993
1994
1995
1996
1997
Model year
Source: Cook, H. E. and A. Wu, On the evaluation of goods and selection of the best
design alternative, Research in Engineering Design. 13. 42-54 (2001).
Direct Value Method for
Marketing Research
When demands are the same,
the price difference is equal to value difference.
Value of Added Rear Sliding Door
on Minivan
Value of 4th Door =$21,225-$20,000 = $1,225
90
80
Price where
demands are
the same.
f [%]
70
60
50
40
30
$21,225
20
$20000
$20500
$21000
$21500
$22000
$22500
Price
Source: Cook, H. E. and A. Wu, On the evaluation of goods and selection of the best
design alternative, Research in Engineering Design. 13. 42-54 (2001).
Experiment for Value of Interior Noise
Source: Pozar M. and Cook H E (1998) On Determining the Relationship Between Vehicle Value and Interior
Noise. SAE Transactions, Journal of Passenger Cars 106:391-401
Resulting Value Curve for Interior Noise
1.2
Best fit curve

1
0.8
V/V0
0.6
Points from
human factor
studies.
0.4
0.2
0
20
40
60
80
Noise level, dB(A)
100
120
Source: Pozar M. and Cook H E (1998) On Determining the Relationship Between Vehicle Value and Interior
Noise. SAE Transactions, Journal of Passenger Cars 106:391-401
Experiment for Value of Pickup Attributes
Source: Monroe, E.M. and Cook, H.E., Determining the Value of Vehicle Attributes Using a PC Based
Tool, 1997 SAE International Congress & Exposition, Detroit, Michigan, February 24 - February 27,
Values Found for Pickup Attributes
$3,500
$3,000
Value of Option
$2,500
All
Own Truck
Not Own Truck
Men
Women
$2,000
$1,500
$1,000
$500
$0
Two-Tone
Color
4x4
Drive
Sporty
Trim
Extended
Cab
Source: Monroe, E.M. and Cook, H.E., Determining the Value of Vehicle Attributes
Using a PC Based Tool, 1997 SAE International Congress & Exposition, Detroit,
Michigan, February 24 - February 27, 1997
Summary & Conclusions
1. A simple model of demand provides both qualitative and
quantitative insight for managing new product
development.
2. Taguchi’s cost of inferior quality can be determined
from the value curve of the attribute. Recommend
replacing Taguchi’s loss function with the cash flow
function.
3. The model also provides the foundation for a more
direct and transparent approach for determining
customer value using either written or computerized
surveys.
4. A single, Universal Metric exists for product
management equal to the time rate of change of value
minus variable cost.