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Welcome back to our course,

Â Quantitative Customer Insight Techniques.

Â We're in module four and this is Lecture Three.

Â And I'm James Lenz from the University of Illinois.

Â So today, what we're going to talk about is market segmentation,

Â that's kind of the third topic associated with this estimating the size of the market.

Â I think it's an important aspect of this type of

Â analysis and it's a very important aspect of quantitative things.

Â And it's a way of problem solving.

Â If you think about how can I figure out how many can I sell of something,

Â you should think about how you can break that down.

Â How many different factors can I use to break that down?

Â And to think about it so that I can now kind of play with those factors and

Â see what is the real estimate for our market sales.

Â So again, there'll be a quiz at the end of this lecture, short quiz.

Â As well as we're working towards this module assignment of calculating revenue estimates,

Â calculate a revenue estimate using market segmentation for your own product idea.

Â Estimating revenue is actually quite simple.

Â It's how many units are you going to sell times the sales price.

Â There's no special technique associated with this.

Â And these estimation approaches are guided by what I call

Â market segmentation and you've probably heard

Â this phrase as well through some of your courses.

Â It's a very similar concept of thinking about

Â a problem in a market and finding the elements that are inside of it,

Â that build up that entire market.

Â So, we're going to work through three different examples.

Â Two of them that you know, and now I bring in

Â a third topic called the ring laser gyroscope which in you're

Â reading is some description of- and it's a fascinating field that at end of the lecture,

Â I'll tell you a little more about this technology and kind of what it's led to

Â today and it's a fascinating influence on humanity, actually.

Â But to start with, let's talk about our favorite macaron cookies.

Â So, if we look at this technique,

Â how do we estimate the market size if we're going to get into this business.

Â Well from, Module two we learned the best value of taste and

Â appearance is what we should focus on in relation to nearby competition.

Â So, this is what we're unmet need is or our value proposition.

Â How do we provide the best value in associated nearby competition?

Â So, we've defined that.

Â Step two, we want to now determine how many potential customers can we get.

Â So how do we go about this?

Â How can we define how many customers can we get for our cookie?

Â So, we break this down into five different factors.

Â In fact, it's probably easier to think about it from the bottom up.

Â So, if we did, how many people would buy our macaron?

Â What's the percentage of this?

Â What's the number of customers per hour that do buy them?

Â From that, I can get that number by thinking of

Â how many hours of sales per day a store is open.

Â How many numbers of days per month is open and how many stores there are.

Â So you think of these different factors.

Â I can use these factors to build up an estimate of how many cookies are being sold.

Â And then from that, I can make an estimate of how many would buy my cookie.

Â As you can see, I can come up with some way of building

Â an estimation about the number of cookies that I could sell,

Â by just saying, I'll sell 100,

Â I'll sell 1,000 or 10,000 or something.

Â I have a methodology.

Â Now, I could play with these numbers as I put them together.

Â I can tweak them, well, this one isn't right,

Â this one isn't right, this one changes.

Â And now I can lay it out in a time scale as

Â well to think about how can this happen, what can happen as you do it.

Â And as you see, with the time scale,

Â as I'll show in the next chart,

Â you can build this kind of S curve.

Â In fact, test of anything you do,

Â your chart should sort of look like this S curve,

Â not because anything mandates it, but it's just shown.

Â That's kind of how business has evolved, how sales grow.

Â So now, we can build and as part of your exercise, here at the end of this,

Â you'll have a copy of this type of spreadsheet that you could fill in for your own idea.

Â But in this case, I'm just doing this month by month.

Â Again, the time frame I recommend that you run this for 10 time frames.

Â In this case, it's months. It might be for years.

Â It might be days.

Â I don't know how fast you could do your new product development.

Â Maybe with apps, you can recognize it in days, maybe even minutes.

Â Today, you can see the effect of introducing something and what can happen.

Â But in this case of cookies,

Â I think it makes sense to think about them in terms of months.

Â So now, I can walk you through

Â this chart or maybe you can spend a lot more time reading it.

Â But the number of stores, in our case,

Â was six in this neighborhood.

Â They're open about 30 days per month.

Â They're all open for about 12 hours.

Â So, there is consistency although,

Â like I could say that maybe there's a month or two

Â where they are on vacation or they change.

Â But in this case, I'm just keeping it consistent.

Â Now, a number of customers per hour are roughly around 40.

Â But during the summer months,

Â and I was looking at this early in the year,

Â so in the summer months,

Â there's more customers because there's tourist that are coming in.

Â And then, I'll sort of get an estimate of how many buy a macaron.

Â About 50 percent that go in buy a macaron.

Â But in the summer months,

Â about 60 percent buy macaron because there's more tourist in,

Â that's a different type of customer that's there.

Â So from this, now I can use all these numbers and multiply them

Â together and I come up with how many macarons are sold in my neighborhood every month.

Â That's a pretty nice number 40,000 to 60,000 to 40,000.

Â And again, I can play with these numbers a little bit.

Â But I think what is fascinating about this market segmentation, as I call it,

Â is that you can tweak these numbers a little bit and say,

Â oh jeez, 40,000 sounds like way too much.

Â So you could do a sanity check on this.

Â They can't be selling 60,000 cookies here,

Â it's got to be more like 30,000.

Â So now, if you edit 30,000,

Â what number is do I have to change to get to 30,000?

Â So I can work backwards through these numbers and see if there's logic.

Â Do a little bit of sanity check.

Â I do a little bit reasonable check against these numbers.

Â And in your peer review of this exercise,

Â that's what you will be doing as well.

Â I will want you to do is to look at

Â other people's forecasts and see if there's a reasonableness to this.

Â See if you can justify in your own mind that those are the right types of activities.

Â And this exercise is very useful for you thinking about your market forecast.

Â I can now come up with a percent and I love

Â these ideas a percent because now, you can play with those.

Â So, what percentage can I sell if I'm going to- I haven't figured out my channel yet,

Â I'm just trying to figure out how many I could sell.

Â So, I need to think of a channel eventually too,

Â and that's part of the product development activity.

Â But now, let's just say I found a way I could sell one percent,

Â then maybe three percent, and then seven percent.

Â Again, this S-curve coming in to show what my potential would be.

Â And this is a strong estimate as Jeff Kaiser said, you know,

Â they make estimates and then there's reality that comes in.

Â And there's a lot of challenges associated with this.

Â But you have to make this estimate at least to justify what is your potential sales.

Â And you see, I show here somewhere between 3,000 to

Â 4,000 cookies a month that we could build this business up for.

Â The next idea is our favorite TE Generator,

Â as I mentioned to you.

Â We went through the previous lecture and looked at

Â quiet power for RV campers, recreational vehicles.

Â So, what's the number of RVs manufactured annually?

Â We looked at the US market, in this case.

Â And then what percentage that order that option.

Â So I can get sort of the market size estimate.

Â So again, I look at the number of RV manufacturers, the number in the US,

Â number of motorized RVs as well as the number of pull behind,

Â what are called travel trailers.

Â They also want portable power,

Â as well, for their activities.

Â So again, the percentage that would order that quite

Â generally is a way I can get to the market size estimates.

Â So again, this spreadsheet here,

Â I can walk you through this or you can spend a little time.

Â The number of US manufacturers is around 30 that build this type of vehicles.

Â The number of motorized RVs manufacturer in

Â the US and the number of travel trailers manufactured in US by year.

Â I did a forecast here.

Â In this case, I'm using years because most businesses in

Â this case you have to think in terms of

Â a long timeframe to get the product to marketplace.

Â So, you can see there's hundreds of thousands,

Â 300,000 up to almost 400,000 types of possible platforms that we could sell to.

Â Now, we're not using the number of US manufacturers in this.

Â But again, it's just an idea of how many companies I need to go to,

Â how many possibilities are there where I have to sell this because I have to sell

Â this one by one to each of these companies.

Â So it's a flavor again of what the effort could be.

Â If there was only one, then you

Â question a little bit how easy is it going to be to make the sales.

Â If there's 30, I feel like I could start to penetrate

Â that market a little bit easier by doing this one or two at a time.

Â Whereas, there's only a few manufacturers,

Â so it will be very difficult to get an S-curve build up in the business.

Â And so then, from that, I can say what percentage I would take in this quiet option.

Â Once again, one, two or three percent.

Â And so, I get to some type of sales: 11,000, 13,000, 17,000.

Â Maybe in 10 years, even up to almost 20,000 units. So, it's an estimate.

Â If I don't like that estimate,

Â I think it's too low, I could change some of these numbers.

Â I'm going to go back and change this.

Â And what's fascinating today is finding out the number of

Â motorized manufactured RVs and trailer tows

Â manufactured in the US is relatively easy to find with the internet.

Â Years ago, it took days to come up with these estimates.

Â Today, I mean, within a matter of 15,

Â 20 minutes, you can come up with pretty good estimates of where they are.

Â And again, these are estimates.

Â They're your judgments that you have to use.

Â It's your data that you're building into this.

Â There isn't going to be a market research group that gives you this exact number.

Â Now, you can contract with companies that will go out and find those numbers.

Â But at times, my experiences they have generate any better numbers than what you can

Â do through your own research and coming up with this rough estimate.

Â So the last example I want to talk about is

Â the ring/laser gyroscope and I'm going to

Â go into a little bit of the technology here, as well.

Â And you read and you heard a little bit about the technology.

Â So, the ring/laser gyroscope is kind of a fascinating concept.

Â In fact, gyroscopes are kind of fascinating.

Â They all go back to the concept of navigation.

Â And, you know, today, everybody loves navigation.

Â We all have personal navigators that take us everywhere and help us with everything.

Â Well, there's a long history of the need of this and

Â it really wasn't personal navigators that drove this.

Â It was the need for ships and buses and caravans,

Â and so on, that wanted more of this technology.

Â We can go back in history and find out that odometers were the main thing.

Â And then, Marco Polo became quite successful of

Â the Silk Road and following the Silk Road by putting

Â an odometer on both the wheels of his cart.

Â So at some point,

Â he was seeing whether he was going more North or more West or he could get

Â a feeling for how much he was valeting from a straight line going East.

Â But by 9300, when electronics came in,

Â then more technologies became available.

Â But in addition to the magnetic compass is

Â gyroscopes and navigation system started to come in.

Â And of course, in 1960s, GPS,

Â the satellite positioning systems became available.

Â And since 1980, there's been some combination

Â of all of these types of devices, especially map matching.

Â And map matching has been used since the 1970s.

Â But today, every automotive navigation system and many personal navigators and so on,

Â all use this idea of following a map.

Â So that you know if you're on a sidewalk, if you're on a trail.

Â It uses that information to help work with the accurate sensors.

Â So, the number of type of gyro technologies has been fascinating,

Â where there's been lots of ideas.

Â There's over 100 ideas here of new gyros.

Â All of these have been prototypes at some point.

Â Only a handful of them have ever made it to high volume production.

Â But it just shows the number of ideas associated with

Â just this one technology and just shows,

Â to me it's fascinating how much work has gone into this to make this- how

Â important it is to generate this many ideas behind this concept of a gyroscope.

Â What a gyroscope measures is rotation.

Â So, it's measuring the rotation of something.

Â It's not measuring the acceleration or the motion,

Â it's measuring does it rotate

Â This way, or this way, or this way.

Â And so, what each one does is measures one angle of rotation.

Â Here's the first prototype of a ring laser gyroscope that was done,

Â and what this measures is,

Â in the plane of that triangular block,

Â as if that triangular block rotates just a little bit, it can measure that.

Â You know what? And the measurements is called radians per second,

Â or degrees per second,

Â it's the amount of motion it could detect.

Â So here is a block diagram of this device,

Â it was prototyped in 1970s,

Â and now they're trying to look for a market.

Â I was just joining companies that were trying to then

Â find markets for this new technology,

Â where can this be sold?

Â So, we went through this concept of, again,

Â the company where I was working with,

Â Honeywell, they want to sell this to Boeing as a navigator.

Â So what's Boeing interested in this, is performance.

Â You have to go through their procurement group,

Â as well as their engineering group,

Â and then eventually the airline picks this up,

Â and eventually it gets to the pilot.

Â So the pilot is very influential in

Â this business of wanting and knowing about the technology.

Â But again, the value chain shows you have to be able to sell this to

Â all of these people and convince all of them that this is a good idea.

Â And what the market we've identified at this point was

Â the first aircraft was called the Boeing 757,

Â which has been fabricated without flight navigator,

Â so the third seat in the cockpit.

Â The goal was to replace that third seat.

Â So now, airlines could run this with

Â only two people in the cockpit without a third person.

Â And today, you see all aircraft are flown

Â this way and it was this technology that drove that,

Â that generated this capability.

Â But at that time we didn't know if we could pull this off or not.

Â So here again, we go through this value chain,

Â I go through it relatively quickly.

Â We're building this gyro navigation system,

Â our end user is Boeing and of course the quality of matching of what the need is.

Â Boeing Engineering is looking at this,

Â they're very interested in making sure it's flight worthy,

Â and get it ready for whatever aircraft it is so you have to work with Boeing Engineering,

Â then you also have to work with Boeing Procurement because again,

Â it's very important for them that it becomes

Â a certified system, and to spend flight test.

Â And so you have to work with engineers to get a flight tested.

Â Now it's been certified to be used on that aircraft.

Â And so it's not that you can just take anything and try it on these airplanes,

Â there's a huge activity to certify things,

Â takes a long time, takes a lot of effort,

Â and you have to fund this and prepare for this.

Â So that's part of the development plan.

Â Understanding this value chain of how can you build through this and create the sales.

Â So again, from the airline,

Â they're buying the device from Boeing,

Â it's FAA so Boeing's worked with the FAA to get the entire aircraft certified,

Â all of those components have been certified to do what they're supposed to do.

Â Their main interest is reliability and maintenance,

Â how can it be repaired on the ground, right at the ramp.

Â Anything that you build has to be trained,

Â and be able to replace them 15-20 minutes because that flight

Â needs to be back on the ground if there's any type of failure in the system.

Â So from the pilot's standpoint,

Â they're looking at Boeing, and of course what they're trying to do is offer safety.

Â They're very interested in the safety issues to the passenger.

Â So again, thinking of this chart as you go through of where can you create value,

Â what creates the value for this type of device.

Â So if I look at the market size,

Â we looked at this and again,

Â soon go through again the number of aircraft manufactured annually,

Â the number of aircraft models,

Â and then how many would be taking this type of model,

Â or how to be switching over from a personal flight navigator,

Â a person in there to a computerized version.

Â So if we look at this also inside of a flight navigator,

Â it turns out there's three gyros in

Â each navigator because you have to measure these three angles of rotation.

Â This pitch, roll, and yaw,

Â and also, aircraft new one was called triple redundancy.

Â So if one system fails,

Â there's two to do this.

Â Now, you might think you just need double redundancy,

Â but it turns out on a flight critical systems you need

Â three because if one is not giving the right answer,

Â now you have two to compare to.

Â If you only had one to compare to, you wouldn't know which one is wrong.

Â So you need two what's called Triple redundancy.

Â So actually, it turns out there's

Â nine gyros sold in each one of these systems for an aircraft.

Â So I look at the number of aircraft manufacturers here I just did it by years,

Â year one, year two, again an annual business cycle,

Â number of aircraft models that each type

Â that are available through all those manufacturers,

Â what percentage of them now,

Â there's some sort of take rate here.

Â What is the percentage that these models of aircraft will

Â replace the Navigator with flight computer.

Â And then the number of models that we become certified for,

Â the percent taking our nav system incumbent at 100%.

Â We were the only ones going to be offering this,

Â we're trying to change the industry,

Â we're bringing in a game changer to the airlines,

Â so we're selling this at all these levels.

Â Engineering, supply management and the airlines that there's a value,

Â and do it a business case on the entire value chain where

Â all the value is created through that entire value chain.

Â So we can capture all of that value as part of pricing our products.

Â And so then, the number of aircraft they're flying with our sensors,

Â so there's nine sensors per aircraft.

Â So again, we get to this volume,

Â so this helps us decide at this investment.

Â And this time, this company was looking at $100 million investment to build the factory,

Â to produce these types of devices at the volume and the quality that was needed.

Â So we needed to have a forecast of what is the potential sales,

Â and how long does this last curve again,

Â how long is it going to take to build up,

Â and what are the barriers to doing that.

Â So this type of chart gives us that insight.

Â So just one last thing,

Â a little diversion here about this, I want to talk,

Â I've been fascinated with this idea of an aircraft landing on water.

Â And as you know, in 2009,

Â an aircraft of Airbus A320 landed on the Hudson River,

Â and one of the reasons,

Â not just the pilot and the co-pilot,

Â they certainly were very important,

Â but an important part was this gyroscope.

Â This gyroscope ran these displays and they're called artificial horizon displays,

Â and when you think about this,

Â when you're trying to skip a rock across water which we've all hopefully tried to do,

Â if you have it just a little bit tail down,

Â guess what happened, his water just sinks.

Â If you have a little bit too flat,

Â it just nose dives in.

Â Well, this was exactly the problem this plane had.

Â And he doesn't know where the water is,

Â he knows roughly where it is but he doesn't know precisely where the water is.

Â And this sensor system,

Â this display is what gave him that information.

Â He could watch that as he brought this plane.

Â And then of course it's gusty, it's windy,

Â there's turbulence from the ground,

Â there's things to watch out for on the river, there's waves.

Â There's lots of issues that he has to deal with, but this sensor,

Â this artificial horizon which is driven by these gyroscopes,

Â give that altitude of that airplane,

Â was what he used to be able to bring this in on a perfect landing.

Â So these sensors were very important,

Â and what's fascinating was the accuracy.

Â When this sensor was developed,

Â it had to replace that human navigator so it had to have accuracy.

Â As a result of that accuracy today,

Â it's allowed this type of,

Â when we built this in the 1970s and built in the production in the 1980s,

Â 20 years later, it's being

Â used to land in emergency situations and giving pilots the capability to do this.

Â So I just list some numbers here to show you this,

Â what the bias stability of this type of sensor is,

Â and what the lifetime is of this type of sensor.

Â So it's just revolutionized navigation.

Â And in fact, they talk about this little bit in

Â the book is that you think about what it leads to,

Â and I think there's some part of the business case as well is what is your strategy,

Â not just can you make money on this product,

Â but what is this going to lead to and lead to next?

Â And as I showed today now,

Â these gyroscopes are built with

Â integrated circuit technology and they're the size of a finger.

Â The same company builds these devices,

Â and what's even more fascinating for you is

Â that you have three of them in your mobile device.

Â There's three gyroscopes in every mobile device that I've seen.

Â As I showed you, I've been more fancy with the magnetic sensor and the compass,

Â what's called the orientation sensor,

Â these are built on the magnetic sensors but there is also now

Â gyroscopes and accelerometers in every type of device,

Â and you can watch the gyroscope as a crazy display they show,

Â but they try to show when you turn this,

Â the sensor will recognize your turn and hold that box stable.

Â So you don't see the box move but you can move

Â your device in all three dimensions showing

Â that it's recognizing the movement of the device,

Â but it's holding that image stable.

Â And as we know that we're using that while we use our camera,

Â we're using this when we do our personal navigation.

Â So this gyroscope is very much used in many features now in mobile devices,

Â and it all started in the 1970s because of the investment into the ring laser gyroscope.

Â So with that summary here for Lecture Three,

Â we'll talk again about this potential unit sales is

Â best estimated by segmenting the market into many factors,

Â as using a number of these factors in a sales forecast offers

Â insight into which market segments are the most critical to sales.

Â It's your data, none of this is going to be absolutely correct,

Â but it's your data to think about these things,

Â and by tweaking those numbers,

Â and thinking about them, and playing with them,

Â and once you get what you believe is the real number,

Â maybe you back up and say, well

Â this estimate or this estimate of that market segment must be off.

Â And I still want to warn you as Jeff Kaiser as earlier,

Â big mistakes are still possible even if we do this market segmentation.

Â But at least, it's a little bit a way of using small amounts of errors,

Â and we hope some of those errors balance each other as I look at

Â all these market segmentations to come up with the sales forecast.

Â So that is the end of this lecture,

Â there is a short quiz and then we'll pick up things in the last lecture of this module.

Â