Wasted Promotion

Theory of Natural Limits

Market Saturation occurs when a new Product becomes fully accepted by the Market.

The economist Thomas Osenton stated that:

“Every product or service has a natural consumption level. We just don’t know what it is until we launch it, distribute it, and promote it for a generation’s time (20 years or more) after which further investment to expand the universe beyond normal limits can be a futile exercise.”

The natural consumption level limits the number of potential Customers in a Category and for a Product. Hence promoting Products that are approaching this limit becomes extraordinarily difficult.

Wikipedia provides the following example:

The American weekly consumer magazine Sports Illustrated was launched in 1954 with 400,000 subscribers and grew through the 1960s, 1970s, and 1980s until reaching 3.5 million subscribers in the late 1980s where it has remained ever since. With some estimates of up to 100 million sports fans in the United States, many at Time Inc. believed that Sports Illustrated’s subscription base could have been much higher. However, after many years of investment, the sports weekly’s natural and most profitable consumption level was reached – where it has remained for more than 20 years.

This Case Study provides a high-level overview of the workflow without detailed explanation. It assumes you are already somewhat familiar with KNIME and Market Simulation. If not, start by reviewing the Building Blocks and Community Nodes.

Competitive Story

Spacely Sprockets was not always the success it is today. In the early days of the company, Customers were unaware of the potential value sprockets could provide. Spacely needed to continuously promote his product to raise Customer awareness. Each year that Spacely improved awareness, he estimated that individual Willingness To Pay (WTP) increased by 10% towards each Customer’s maximum. But as Customer awareness grew, the marginal contribution of Spacely’s awareness campaigns towards profitability started to diminish.

Building Awareness

Spacely Sprockets is the innovative Product and has a Monopoly over the Market. To analyze sales growth with this Market Simulation, two Customer Willingness To Pay (WTP) Distributions are created:

  1. Current WTP for Spacely Sprockets
  2. Maximum WTP

Each year for 25 years (loop iterations), Spacely’s awareness campaigns increase Customer WTP by 10% towards their maximum level. In the beginning, this made a huge difference to Spacely Sprocket sales, with Customers crossing the point where their WTP was greater than the Product’s Price. But after 20 loop iterations fewer and fewer new Customers started purchasing the Product and the rate of growth declined.

Customer Distributions

Track both the Current WTP and Maximum WTP of each Customer.

Increase WTP

Each loop iteration the WTP increases by 10% towards the maximum.

Approaching Saturation

After 25 loop iterations the Current WTP is nearly maximized.

Sales Growth

The sales growth can be compared from one year to the next using the ‘Lag Column’ node. When the growth is charted it becomes clear that the rate of growth peeked after 5 years, with growth slowly declining from then on.

Lag Column

Compare last year’s Profit with this year’s Profit.

Calculate Growth

The ‘Math Formula’ node calculates the Profit Growth each year.

Slowing Growth

Growth declines as the Market approaches its consumption limit.