Welcome back to our course, Quantitative Customer Insight Techniques. We're in module four and this is Lecture Three. And I'm James Lenz from the University of Illinois. So today, what we're going to talk about is market segmentation, that's kind of the third topic associated with this estimating the size of the market. I think it's an important aspect of this type of analysis and it's a very important aspect of quantitative things. And it's a way of problem solving. If you think about how can I figure out how many can I sell of something, you should think about how you can break that down. How many different factors can I use to break that down? And to think about it so that I can now kind of play with those factors and see what is the real estimate for our market sales. So again, there'll be a quiz at the end of this lecture, short quiz. As well as we're working towards this module assignment of calculating revenue estimates, calculate a revenue estimate using market segmentation for your own product idea. Estimating revenue is actually quite simple. It's how many units are you going to sell times the sales price. There's no special technique associated with this. And these estimation approaches are guided by what I call market segmentation and you've probably heard this phrase as well through some of your courses. It's a very similar concept of thinking about a problem in a market and finding the elements that are inside of it, that build up that entire market. So, we're going to work through three different examples. Two of them that you know, and now I bring in a third topic called the ring laser gyroscope which in you're reading is some description of- and it's a fascinating field that at end of the lecture, I'll tell you a little more about this technology and kind of what it's led to today and it's a fascinating influence on humanity, actually. But to start with, let's talk about our favorite macaron cookies. So, if we look at this technique, how do we estimate the market size if we're going to get into this business. Well from, Module two we learned the best value of taste and appearance is what we should focus on in relation to nearby competition. So, this is what we're unmet need is or our value proposition. How do we provide the best value in associated nearby competition? So, we've defined that. Step two, we want to now determine how many potential customers can we get. So how do we go about this? How can we define how many customers can we get for our cookie? So, we break this down into five different factors. In fact, it's probably easier to think about it from the bottom up. So, if we did, how many people would buy our macaron? What's the percentage of this? What's the number of customers per hour that do buy them? From that, I can get that number by thinking of how many hours of sales per day a store is open. How many numbers of days per month is open and how many stores there are. So you think of these different factors. I can use these factors to build up an estimate of how many cookies are being sold. And then from that, I can make an estimate of how many would buy my cookie. As you can see, I can come up with some way of building an estimation about the number of cookies that I could sell, by just saying, I'll sell 100, I'll sell 1,000 or 10,000 or something. I have a methodology. Now, I could play with these numbers as I put them together. I can tweak them, well, this one isn't right, this one isn't right, this one changes. And now I can lay it out in a time scale as well to think about how can this happen, what can happen as you do it. And as you see, with the time scale, as I'll show in the next chart, you can build this kind of S curve. In fact, test of anything you do, your chart should sort of look like this S curve, not because anything mandates it, but it's just shown. That's kind of how business has evolved, how sales grow. So now, we can build and as part of your exercise, here at the end of this, you'll have a copy of this type of spreadsheet that you could fill in for your own idea. But in this case, I'm just doing this month by month. Again, the time frame I recommend that you run this for 10 time frames. In this case, it's months. It might be for years. It might be days. I don't know how fast you could do your new product development. Maybe with apps, you can recognize it in days, maybe even minutes. Today, you can see the effect of introducing something and what can happen. But in this case of cookies, I think it makes sense to think about them in terms of months. So now, I can walk you through this chart or maybe you can spend a lot more time reading it. But the number of stores, in our case, was six in this neighborhood. They're open about 30 days per month. They're all open for about 12 hours. So, there is consistency although, like I could say that maybe there's a month or two where they are on vacation or they change. But in this case, I'm just keeping it consistent. Now, a number of customers per hour are roughly around 40. But during the summer months, and I was looking at this early in the year, so in the summer months, there's more customers because there's tourist that are coming in. And then, I'll sort of get an estimate of how many buy a macaron. About 50 percent that go in buy a macaron. But in the summer months, about 60 percent buy macaron because there's more tourist in, that's a different type of customer that's there. So from this, now I can use all these numbers and multiply them together and I come up with how many macarons are sold in my neighborhood every month. That's a pretty nice number 40,000 to 60,000 to 40,000. And again, I can play with these numbers a little bit. But I think what is fascinating about this market segmentation, as I call it, is that you can tweak these numbers a little bit and say, oh jeez, 40,000 sounds like way too much. So you could do a sanity check on this. They can't be selling 60,000 cookies here, it's got to be more like 30,000. So now, if you edit 30,000, what number is do I have to change to get to 30,000? So I can work backwards through these numbers and see if there's logic. Do a little bit of sanity check. I do a little bit reasonable check against these numbers. And in your peer review of this exercise, that's what you will be doing as well. I will want you to do is to look at other people's forecasts and see if there's a reasonableness to this. See if you can justify in your own mind that those are the right types of activities. And this exercise is very useful for you thinking about your market forecast. I can now come up with a percent and I love these ideas a percent because now, you can play with those. So, what percentage can I sell if I'm going to- I haven't figured out my channel yet, I'm just trying to figure out how many I could sell. So, I need to think of a channel eventually too, and that's part of the product development activity. But now, let's just say I found a way I could sell one percent, then maybe three percent, and then seven percent. Again, this S-curve coming in to show what my potential would be. And this is a strong estimate as Jeff Kaiser said, you know, they make estimates and then there's reality that comes in. And there's a lot of challenges associated with this. But you have to make this estimate at least to justify what is your potential sales. And you see, I show here somewhere between 3,000 to 4,000 cookies a month that we could build this business up for. The next idea is our favorite TE Generator, as I mentioned to you. We went through the previous lecture and looked at quiet power for RV campers, recreational vehicles. So, what's the number of RVs manufactured annually? We looked at the US market, in this case. And then what percentage that order that option. So I can get sort of the market size estimate. So again, I look at the number of RV manufacturers, the number in the US, number of motorized RVs as well as the number of pull behind, what are called travel trailers. They also want portable power, as well, for their activities. So again, the percentage that would order that quite generally is a way I can get to the market size estimates. So again, this spreadsheet here, I can walk you through this or you can spend a little time. The number of US manufacturers is around 30 that build this type of vehicles. The number of motorized RVs manufacturer in the US and the number of travel trailers manufactured in US by year. I did a forecast here. In this case, I'm using years because most businesses in this case you have to think in terms of a long timeframe to get the product to marketplace. So, you can see there's hundreds of thousands, 300,000 up to almost 400,000 types of possible platforms that we could sell to. Now, we're not using the number of US manufacturers in this. But again, it's just an idea of how many companies I need to go to, how many possibilities are there where I have to sell this because I have to sell this one by one to each of these companies. So it's a flavor again of what the effort could be. If there was only one, then you question a little bit how easy is it going to be to make the sales. If there's 30, I feel like I could start to penetrate that market a little bit easier by doing this one or two at a time. Whereas, there's only a few manufacturers, so it will be very difficult to get an S-curve build up in the business. And so then, from that, I can say what percentage I would take in this quiet option. Once again, one, two or three percent. And so, I get to some type of sales: 11,000, 13,000, 17,000. Maybe in 10 years, even up to almost 20,000 units. So, it's an estimate. If I don't like that estimate, I think it's too low, I could change some of these numbers. I'm going to go back and change this. And what's fascinating today is finding out the number of motorized manufactured RVs and trailer tows manufactured in the US is relatively easy to find with the internet. Years ago, it took days to come up with these estimates. Today, I mean, within a matter of 15, 20 minutes, you can come up with pretty good estimates of where they are. And again, these are estimates. They're your judgments that you have to use. It's your data that you're building into this. There isn't going to be a market research group that gives you this exact number. Now, you can contract with companies that will go out and find those numbers. But at times, my experiences they have generate any better numbers than what you can do through your own research and coming up with this rough estimate. So the last example I want to talk about is the ring/laser gyroscope and I'm going to go into a little bit of the technology here, as well. And you read and you heard a little bit about the technology. So, the ring/laser gyroscope is kind of a fascinating concept. In fact, gyroscopes are kind of fascinating. They all go back to the concept of navigation. And, you know, today, everybody loves navigation. We all have personal navigators that take us everywhere and help us with everything. Well, there's a long history of the need of this and it really wasn't personal navigators that drove this. It was the need for ships and buses and caravans, and so on, that wanted more of this technology. We can go back in history and find out that odometers were the main thing. And then, Marco Polo became quite successful of the Silk Road and following the Silk Road by putting an odometer on both the wheels of his cart. So at some point, he was seeing whether he was going more North or more West or he could get a feeling for how much he was valeting from a straight line going East. But by 9300, when electronics came in, then more technologies became available. But in addition to the magnetic compass is gyroscopes and navigation system started to come in. And of course, in 1960s, GPS, the satellite positioning systems became available. And since 1980, there's been some combination of all of these types of devices, especially map matching. And map matching has been used since the 1970s. But today, every automotive navigation system and many personal navigators and so on, all use this idea of following a map. So that you know if you're on a sidewalk, if you're on a trail. It uses that information to help work with the accurate sensors. So, the number of type of gyro technologies has been fascinating, where there's been lots of ideas. There's over 100 ideas here of new gyros. All of these have been prototypes at some point. Only a handful of them have ever made it to high volume production. But it just shows the number of ideas associated with just this one technology and just shows, to me it's fascinating how much work has gone into this to make this- how important it is to generate this many ideas behind this concept of a gyroscope. What a gyroscope measures is rotation. So, it's measuring the rotation of something. It's not measuring the acceleration or the motion, it's measuring does it rotate This way, or this way, or this way. And so, what each one does is measures one angle of rotation. Here's the first prototype of a ring laser gyroscope that was done, and what this measures is, in the plane of that triangular block, as if that triangular block rotates just a little bit, it can measure that. You know what? And the measurements is called radians per second, or degrees per second, it's the amount of motion it could detect. So here is a block diagram of this device, it was prototyped in 1970s, and now they're trying to look for a market. I was just joining companies that were trying to then find markets for this new technology, where can this be sold? So, we went through this concept of, again, the company where I was working with, Honeywell, they want to sell this to Boeing as a navigator. So what's Boeing interested in this, is performance. You have to go through their procurement group, as well as their engineering group, and then eventually the airline picks this up, and eventually it gets to the pilot. So the pilot is very influential in this business of wanting and knowing about the technology. But again, the value chain shows you have to be able to sell this to all of these people and convince all of them that this is a good idea. And what the market we've identified at this point was the first aircraft was called the Boeing 757, which has been fabricated without flight navigator, so the third seat in the cockpit. The goal was to replace that third seat. So now, airlines could run this with only two people in the cockpit without a third person. And today, you see all aircraft are flown this way and it was this technology that drove that, that generated this capability. But at that time we didn't know if we could pull this off or not. So here again, we go through this value chain, I go through it relatively quickly. We're building this gyro navigation system, our end user is Boeing and of course the quality of matching of what the need is. Boeing Engineering is looking at this, they're very interested in making sure it's flight worthy, and get it ready for whatever aircraft it is so you have to work with Boeing Engineering, then you also have to work with Boeing Procurement because again, it's very important for them that it becomes a certified system, and to spend flight test. And so you have to work with engineers to get a flight tested. Now it's been certified to be used on that aircraft. And so it's not that you can just take anything and try it on these airplanes, there's a huge activity to certify things, takes a long time, takes a lot of effort, and you have to fund this and prepare for this. So that's part of the development plan. Understanding this value chain of how can you build through this and create the sales. So again, from the airline, they're buying the device from Boeing, it's FAA so Boeing's worked with the FAA to get the entire aircraft certified, all of those components have been certified to do what they're supposed to do. Their main interest is reliability and maintenance, how can it be repaired on the ground, right at the ramp. Anything that you build has to be trained, and be able to replace them 15-20 minutes because that flight needs to be back on the ground if there's any type of failure in the system. So from the pilot's standpoint, they're looking at Boeing, and of course what they're trying to do is offer safety. They're very interested in the safety issues to the passenger. So again, thinking of this chart as you go through of where can you create value, what creates the value for this type of device. So if I look at the market size, we looked at this and again, soon go through again the number of aircraft manufactured annually, the number of aircraft models, and then how many would be taking this type of model, or how to be switching over from a personal flight navigator, a person in there to a computerized version. So if we look at this also inside of a flight navigator, it turns out there's three gyros in each navigator because you have to measure these three angles of rotation. This pitch, roll, and yaw, and also, aircraft new one was called triple redundancy. So if one system fails, there's two to do this. Now, you might think you just need double redundancy, but it turns out on a flight critical systems you need three because if one is not giving the right answer, now you have two to compare to. If you only had one to compare to, you wouldn't know which one is wrong. So you need two what's called Triple redundancy. So actually, it turns out there's nine gyros sold in each one of these systems for an aircraft. So I look at the number of aircraft manufacturers here I just did it by years, year one, year two, again an annual business cycle, number of aircraft models that each type that are available through all those manufacturers, what percentage of them now, there's some sort of take rate here. What is the percentage that these models of aircraft will replace the Navigator with flight computer. And then the number of models that we become certified for, the percent taking our nav system incumbent at 100%. We were the only ones going to be offering this, we're trying to change the industry, we're bringing in a game changer to the airlines, so we're selling this at all these levels. Engineering, supply management and the airlines that there's a value, and do it a business case on the entire value chain where all the value is created through that entire value chain. So we can capture all of that value as part of pricing our products. And so then, the number of aircraft they're flying with our sensors, so there's nine sensors per aircraft. So again, we get to this volume, so this helps us decide at this investment. And this time, this company was looking at $100 million investment to build the factory, to produce these types of devices at the volume and the quality that was needed. So we needed to have a forecast of what is the potential sales, and how long does this last curve again, how long is it going to take to build up, and what are the barriers to doing that. So this type of chart gives us that insight. So just one last thing, a little diversion here about this, I want to talk, I've been fascinated with this idea of an aircraft landing on water. And as you know, in 2009, an aircraft of Airbus A320 landed on the Hudson River, and one of the reasons, not just the pilot and the co-pilot, they certainly were very important, but an important part was this gyroscope. This gyroscope ran these displays and they're called artificial horizon displays, and when you think about this, when you're trying to skip a rock across water which we've all hopefully tried to do, if you have it just a little bit tail down, guess what happened, his water just sinks. If you have a little bit too flat, it just nose dives in. Well, this was exactly the problem this plane had. And he doesn't know where the water is, he knows roughly where it is but he doesn't know precisely where the water is. And this sensor system, this display is what gave him that information. He could watch that as he brought this plane. And then of course it's gusty, it's windy, there's turbulence from the ground, there's things to watch out for on the river, there's waves. There's lots of issues that he has to deal with, but this sensor, this artificial horizon which is driven by these gyroscopes, give that altitude of that airplane, was what he used to be able to bring this in on a perfect landing. So these sensors were very important, and what's fascinating was the accuracy. When this sensor was developed, it had to replace that human navigator so it had to have accuracy. As a result of that accuracy today, it's allowed this type of, when we built this in the 1970s and built in the production in the 1980s, 20 years later, it's being used to land in emergency situations and giving pilots the capability to do this. So I just list some numbers here to show you this, what the bias stability of this type of sensor is, and what the lifetime is of this type of sensor. So it's just revolutionized navigation. And in fact, they talk about this little bit in the book is that you think about what it leads to, and I think there's some part of the business case as well is what is your strategy, not just can you make money on this product, but what is this going to lead to and lead to next? And as I showed today now, these gyroscopes are built with integrated circuit technology and they're the size of a finger. The same company builds these devices, and what's even more fascinating for you is that you have three of them in your mobile device. There's three gyroscopes in every mobile device that I've seen. As I showed you, I've been more fancy with the magnetic sensor and the compass, what's called the orientation sensor, these are built on the magnetic sensors but there is also now gyroscopes and accelerometers in every type of device, and you can watch the gyroscope as a crazy display they show, but they try to show when you turn this, the sensor will recognize your turn and hold that box stable. So you don't see the box move but you can move your device in all three dimensions showing that it's recognizing the movement of the device, but it's holding that image stable. And as we know that we're using that while we use our camera, we're using this when we do our personal navigation. So this gyroscope is very much used in many features now in mobile devices, and it all started in the 1970s because of the investment into the ring laser gyroscope. So with that summary here for Lecture Three, we'll talk again about this potential unit sales is best estimated by segmenting the market into many factors, as using a number of these factors in a sales forecast offers insight into which market segments are the most critical to sales. It's your data, none of this is going to be absolutely correct, but it's your data to think about these things, and by tweaking those numbers, and thinking about them, and playing with them, and once you get what you believe is the real number, maybe you back up and say, well this estimate or this estimate of that market segment must be off. And I still want to warn you as Jeff Kaiser as earlier, big mistakes are still possible even if we do this market segmentation. But at least, it's a little bit a way of using small amounts of errors, and we hope some of those errors balance each other as I look at all these market segmentations to come up with the sales forecast. So that is the end of this lecture, there is a short quiz and then we'll pick up things in the last lecture of this module.