A New Approach to Modeling Replacement Sales: Forced versus Discretionary Replacements
Queensland University of Technology - School of Management
Christian-Albrechts-Universitaet at Kiel
Why is understanding replacement purchases of consumer durables so important? It is the sales of replacement units that will ensure their long-term success. Replacement sales account for more than 75% of total sales for many durables (Islam and Meade 2000). Thus, the accurate modeling of replacements is important to forecast overall demand, particularly later in the product life cycle when they dominate total sales. In addition, knowing at what age consumes are most likely to replace units is important for durable goods marketers to target customers at the right time.
By distinguishing between forced and discretionary replacements and utilizing the Modified Gamma distribution, three contributions are made. First, the Modified Gamma distribution was shown to fit both the forced and discretionary replacement rate distributions much better than earlier models. Second, we examine the accuracy of sales forecasting by combining sales data with the survey data of household replacements. Third, a promotion response model was developed incorporating an asymmetric impact of marketing effort on forced versus discretionary replacements. This provides very interesting insights for managers when designing promotions to encourage consumers to replace older units.
Number of Pages in PDF File: 33
Keywords: Diffusion of Innovations, Forecasting, Durable Goods, Repeat Purchases
JEL Classification: M20working papers series
Date posted: June 11, 2008
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