The installed base is the total number of placed units of a particular product in the entire market or product segment. For example, the total installed base of the XA100 laser-based metal cutting machine was 495 units at the end of 1990. This was calculated by adding all the unit sales of the XA100 since the introduction of the product in 1984. The total market installed base for industrial laser cutting tools was 2,400 units at the end of 1990. When calculating the installed base of the market, it is important that you exclude products that have since been replaced by technology upgrades, or units that are no longer in use. That is, be careful to avoid double counting.

Methods of Measurement

The three primary methods for determining the installed product base in a market are:

• End-user survey
• Competitive interviews
• Trade associations and other secondary sources

End-User Survey

The end-user survey is by far the most difficult and costly of the three methods. By surveying as large a percentage of the end-user base as possible, you can acquire a great deal of information about the equipment it is currently using and how many units have been placed in the market. A typical response rate to an end-user survey is about 40 percent by phone and 5 percent by mail. A great deal of extrapolation is required to provide estimates for the entire user installed base should it be a large one (such as computer users).

Competitive Interviews

Interviews with competitors are typically the best source of information. A variety of detailed information regarding installed base, customer groups, sales trends, and replacement rates can be extracted during a conversation with a willing competitor employee. Unfortunately, companies are generally unlikely to divulge any proprietary information to their principal competitors. We must stress at this time that to interview members of your competitor's organization under an assumed identity is highly unethical and may cross the boundaries of legality.

Your best alternative is honest information exchange. The chances are that your primary competitors are as interested to find out about you as you are about them and may readily agree to an information-sharing session. However, if mishandled, this could prove detrimental to your own competitive position. The solution to this problem often lies with an unbiased third party.

A market engineering firm can be commissioned by you to conduct competitor interviews. Companies are often more willing to discuss proprietary issues with an independent company preparing an overview of the entire industry. This is potentially the only way in which you can acquire highly sensitive competitor data from your primary competitors without crossing ethical lines.

Trade Associations

Many industries are monitored by trade associations that serve as clearinghouses for industry data and sometimes publish detailed industry statistics. Some are more willing than others to provide information to researchers, and an introduction from an association member is often helpful. Whether or not the association is a source of data, staff members are extremely useful in alerting the researcher to any published information about the industry and in discussing general impressions of how the industry functions, its key factors, and vital trends. Often, associations will possess valuable information pertaining to the size of particular markets and installed product bases.

An example of an installed base measurement and database is given in Figure 1 below. It illustrates the structure and format that can be used to make this measurement.

What Does Installed Base Really Tell You?

The installed base of a product gives you a solid understanding of how large the actual end-user base is. This is particularly useful if you are introducing a product improvement, a product upgrade, a peripheral device, or a related service, or if you are performing a repair service on that installed base.

Figure 1 - Installed Base: Calculation* of Unit Sales

Product Name	Product Introduction Date	1991	1992	1993	1994	Total Installed Base
Teknic	1991	70	92	105	41	308
Protek	1992	0	45	60	65	170
Amisis	1991	10	15	30	35	90
Zapski	1994	0	0	0	7	7
Motomoto	1991	7	14	15	10	46
Total Installed Base		87	166	210	158	621
* Assumes no products have been replaced.

Note: All figures are rounded. Source: Frost & Sullivan

The measurement of installed base is a less-important measurement when a product is still in its high growth stage, when market saturation is relatively low.

Installed base measurements are also helpful in determining the popularity of given products or groups of products. From that information, you might be able to see design or marketing ideas that were quite successful with the end-user base. The installed base calculation will also tell you a little bit about where the product is in the product life cycle. If there are 10,000 end-users in the market and there is an installed base of 8,900, it is obvious that you are in the maturity stage of the market.

The size of the installed base, coupled with the size of the total customer base, will give you an excellent gauge on which to base your marketing investments. For example, you would not mail 500,000 pieces of mail to an installed base of 10,000. The installed base can also help gauge how much you should spend on R&D for new or update product development, or technology that will replace the current installed base.

Case Study: Telemanagement Software

Installed base measurements are particularly important when new equipment sales depend on equipment already installed in the market. This case history is given to illustrate this point. Two colleagues were employed in the U.S. by one of Europe's largest telecommunications companies. Over a period of years, the firm developed telemanagement software that was to be used in conjunction with the private branch exchange (PBX) their employer had been manufacturing for over ten years.

This program worked with the telephone system to monitor calls, account for client billing, and perform least-call routing. As they developed the software in their spare time, they began preparing to leave their employer and create their own company.

They developed a business plan with a detailed sales forecast, marketing strategy, production plan, and financial analysis. Unfortunately, they did not perform adequate market engineering. In due time, the company was launched, sales representatives were hired, product literature was developed, and money spent.

As months passed, sales were not coming in as rapidly as was hoped, so more funds were allocated to advertising, trade shows, and direct mail to rented lists. Unfortunately, the impact on sales was negligible. Eventually, the partners informed us that they were preparing to close the business down and seek employment. They had lost approximately $200,000 and were completely discouraged. Saddened to see two entrepreneurs ready to give up on a promising venture, we offered to help.

As the product in question was completely tied to a specific brand of PBX, we began researching the market for this PBX, focusing foremost on the installed base. As it turned out, the PBX unit had a 3 percent market share in the U.S., which translated into an installed base of about 1,100 units.

Our first comment to the individuals involved was, "Why are you advertising when the installed base of users is only 1,100?" Each advertisement they made cost close to $4,000 and reached 50,000 readers, of which fewer than 1 percent were potential customers. In clearer words, 99 percent of their advertising budget was wasted.

We next focused on their direct mail program. In this instance, they were mailing to a general list of PBX users, of which about 3 percent were potential clients. Again, 97 percent of their direct mail budget was being thrown out the window. The first thing these two individuals should have done was to identify the installed base of the PBXs in question. Ideally, they would have secured a list of installation sites from their previous employer. If they had this installed base list, they could have focused all of their marketing budget on potential customers.

A subsequent analysis showed that, if the budget were reduced by 90 percent and marketing were targeted at the current potential customer base, they could well have been profitable. As it turned out, the individuals concerned were unable to get a list of their previous employer's installed base. The company concerned was unwilling to release the information. Unfortunately, the research we performed was too little and too late. Their capital was gone, and the company was forced to close.