MATHEMATICAL MODEL TO PREDICT FUTURE VIDEO GAME SALES

Liz Reis, Jessey Ziebach, Tyler Hoffman

DECEMBER 11, 2013

UNIVERSITY OF EVANSVILLE Math 495-Dr. Davis

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Abstract
We created a mathematical model for predicting the sales of video games after they have been released. Our model is based off of the Bass Diffusion model. We started this project by researching previous work involving predicting new product adoption. After choosing to base our model after the Bass Diffusion model, we collected large amounts of data for a number of potentially significant variables. We determined which of these variables were statistically significant to our model by using regression analysis in Excel. We found that Number of PreOrders and Average Rating were the only two factors that were statistically significant. Using these factors, we created an equation for calculating ; which is the total number of people who adopt the product. We then used and additional regression analysis to find p and q, the coefficient of innovators and coefficient of imitators for each video game respectively. After obtaining these three values, we plug them into our Bass Diffusion Model and create graphs or the predicted sales. We then reflect on ways that our model could be improved.

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Introduction
Over the past 40 years, a large industry has grown up around the design, development, and delivery of video games for home game consoles. This industry has grown to monumental size compared to its original fledgling size. According to Terry Babb in his article Comparing Video Game Sales by Gaming Platform, the U.S. video game market is now worth over $20 billion annually in software and hardware sales (25). A recent study, Video Games in the 21st Century: The 2010 Report, detailed the impact that computer and video game companies have on Americas economy. From 2005 to 2010 the entertainment software industrys revenue has more than doubled, shadowing the U.S. Gross Domestic Product (GDP) which only grew by 16 percent (Siwek, 23). Overall, video games are not a trend or just for young people, but increasingly an activity that attempts to incorporate everyone: 68% of American households now play video games; additionally, 43% of online game players are female (Babb, page 26). This growing market has led to an enormous opportunity for new curriculums in colleges and a healthier job market. As the job market keeps growing, it becomes harder for video game developers and companies to stay competitive in the job market. To be a successful company, you must be able to satisfy consumers to create loyal customers. Our goal for this project was to attempt to find a way to properly model video game sales. Through this model we should be able to determine the biggest factors that are significant to the sales as well as predict how sales of a product will react in the future. This type of model could be extremely beneficial to companies looking to maximize their sales. This also opens up

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other opportunities for companies to compare against competitors and, depending on the significance of certain variables we use in the model, companies will be able to adjust marketing campaigns accordingly. Also, our model will be able to give companies an accurate prediction of how many copies of a game they are going to sell so that they do not overproduce. We have found multiple resources that build similar models based on new product adoption; however, we have not found many sources that attempt to build the same type of model using the same variables as we have.

Literature
When we were first selecting our topic, we came across a paper titled Mathematical model for hit phenomena as stochastic process of interactions of human interactions written by Akira Ishii with colleagues at the Department of Applied Mathematics and Physics at Tottori University. Initially, this paper seemed like it would be the foundation for our project. In his study, Ishii modeled hit phenomena of entertainments through human interaction. He focuses mainly on the introduction of new movies which is very relatable to video games. An assumption that is common between our models is that the product will only be adopted once, such as only buying a particular video game once or viewing a movie once. Ishii states that the traditional way of the model to forecast movie revenue was to assume the simple model, R=ABCeD Where A, B, C and D are, for example, budget of advertisement of the movie, strength of the words of mouth, the impression of starring, etc (Ishii, 3). However, this model has no way to include the dynamics of human interactions because it is too simplified. Instead, he introduces the idea of the Bass Model which was presented as the simple model of aggregation behavior of

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human interaction in 1969. The key concept of the Bass model is the fact that it is a diffusion model. There are many variations of the Bass model, but unfortunately Ishiis model was not compatible with the goal of our project. However, this introduced us to Bass model for future use in our project. Other sources were very helpful in showing how video games effected the economy such as theesa.com. Jeffry Babb compared the number of sales between multiple video game consoles in his paper Comparing Video Game Sale by Gaming Platform. However, we have yet to find a study trying to answer the same questions that we are: What are main significant factors when it comes to consumers purchasing video games? Can we accurately model and predict their sales? Based on the mention of the Bass model in Ishiis article, we came across a helpful article written by Joe Dodson of UW School of Business. This article was extremely helpful in helping us attempt to fit data to the Bass model. It also ends the article with tips on estimating Market potential (M), the coefficient of innovation (p) and the coefficient of imitation (q).

Model
The Bass Diffusion model has come to be known as undoubtedly one of the most widely used, frequently used and thoroughly researched marketing models in the world (Lilien, 1). It has withstood the test of time and the numerous expansions it has been given to extend it. Yet, the basic three parameter model continues to deliver useful forecasts for executive decisions within a company. The Bass model is unique because it is so versatile. It can represent distinctly different patterns of adoptions from slow growth sleepers to instant hit blockbusters (Lilien, 1). There are a few assumptions that are made for our Bass model. First is that eventually all will purchase the product, where is the total population that will ever

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adopt the product. Next is that the adoption process is binary. Lastly, we make the assumption that one consumer will only purchase the product once. To create our Bass Diffusion model, we used the equation: S (t+1) = p*N + (q-p)*Q (t) (q/N)*Q (t)2 where S (t) is the number of sales for the current week, p is the coefficient of innovation, q is the coefficient of imitators, and Q(t) is the cumulative number of adopters up to week t. p is usually less than .03 and q is usually between .3 and .5 depending on the product. These values should give a bell shaped curve when plotted; however, since we make the assumption that the game is only bought once per consumer, our model will only display the downward sloping portion of the bell curve.

Data Collection
Initially, we chose twenty-two games spread among multiple platforms to attempt to model and predict sales for. These games were: Batman: Arkham Origins, Assassins Creed IV: Black Flag, Battlefield 4, Destiny, Castlevania: Lords of Shadow 2, Super Smash Bros., Grand Theft Auto V, Pokemon X/Y, Fifa 14, Call of Duty: Ghosts, Killzone: Shadows Fall, Lost Planet 3, Bioshock: Infinite, Dead Space 3, Beyond: Two Souls, Lego Marvel Super Heroes, Crysis 3, Tomb Raider, Pandoras Tower, Resident Evil: Revelations, Remember Me, and Pikmin 3. Influenced by Ishiis article, we decided to collect data in the categories: Facebook Series Likes, Series Talking about This, Likes (from the most popular page), Talking about This, Twitter Followers, the Rating Average (out of 100), Pre-Orders and Total Copies Sold (Globally). However, after studying the Bass model further we agreed to consolidate some variables and obtain more variables to test for significance. We also added an additional ten-fifteen games to add more diversity. We eventually settled on the following factors: the ESRB rating, what type

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of game it is like role-playing, action, or sports, if the game had multiplayer and single player, if it was part of a series, the number of likes for the series on Facebook, the number of people talking about the series on Facebook, the number of Twitter followers, the average rating, and the number of preorders for the game. We obtained this data from Facebook.com, Twitter.com, VGChartz.com, and the official ESRB website. However, there were some simplifications that had to be made due to our sources for data collection. Due to VGChartz only displaying the first ten weeks of sales, we had to make the assumption that all copies of the game that were going to be sold were all in the first ten weeks. Another roadblock we ran into were multiple releases for video games. An example would be the weekly sales data for Pikmin 3.
Week Weekly Sales 95,802 1 29,497 2 3 4 5 6 7 8 9 10 47,421 25,942 138,886 39,161 21,055 17,019 13,503 11,643

As you can see, there was a large spike in sales during week 5 of Pikmin 3s first ten weeks of sales. This is because the game was originally released in Japan earlier than it was released in North America. If we were to graph the weekly sales of this game, it would have a large spike. These limitations ruled out games that would be impossible to model due to separate release dates. Our model should be accurate despite the limitations.

Using the Model

The first step variable needed when calculating the Bass Diffusion model is because it is used when calculating the coefficients of p and q. This is where we had a temporary roadblock in finding a proper way to calculate . Eventually, we discovered that we could use Regression Analysis of the Data Analysis add-on in Microsoft Excel to test the statistical significance of our variables. After running the regression, we discovered that the only two factors significant when calculating were Average Rating and Number of Pre-Orders. Since

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we only had a few games that had a value of zero for Number of Pre-Orders, we removed them from our list. We then ran the regression again only using the two significant factors to obtain the intercept -11289462.77. Using this data, we created the equation to estimate : = -11289462.77 + 139031.03x1 + 5.1x2 where x1 is the Average Rating and x2 is the Number of Pre-Orders. We then used this equation to calculate for all of the games left in our list. We then took the value of found and compared it to the total number of sales. Our results were mixed. Some of our estimations for were close to the total number of copies of the game sold, but some were not. It is important that the calculated is close to the number of games sold or else or model would not fit very well. To ensure that our model would be as accurate as possible, we took and divided it by the total number of games sold. We then used only the games whose values were between .75 and 1.25 for our model. Since we have the calculated for the remaining games, we can now calculate the values of p and q using the following formulas: p=

q=p+

where a is the intercept of the regression output of each game, b is the first variable of regression output, and is our previously calculated . Each of these values is determined for our remaining nine games in our analysis. For each game that was close to the number of copies of games sold, our value for p was between 0.29 and 0.83. The q values were between -0.52 and -.06. * The values of q are negative to obtain the downward slope of the bell curve. Lastly, after getting values for , p, and q we are ready to graph the Bass Diffusion model using the previously stated equation:

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S (t+1) = p*N + (q-p)*Q (t) (q/N)*Q (t)2 where S (t) is the number of sales for the current week, p is the coefficient of innovation, q is the coefficient of imitators, and Q(t) is the cumulative number of adopters up to week t. This graph will show us how accurately our model predicted the sales of the games. All of the graphs of our models were consistent with the comparison of our to our Total Sales that we calculated earlier in the project. Our graphs were slightly greater or lesser than the actual sales if our was slightly higher or lower than Total Sales during the comparison. Although there is a little variation, our model for the nine games is pretty accurate.

Analysis of Results
Every graph that we created using our Bass Diffusion model was very close to the actual number sold for that game. As stated before, our models predicted values were either a little high or low based on our previous comparison of to that the Total Sales.

1.4
1.2 1 SALES 0.8 0.6 0.4 0.2 0
Week 2 4

Uncharted 3

3
2.5 2 1.5
Sales
3,730,092

N 0.34 p -0.48 q

1 0.5

10

12

14

16

18

20

22

24

Week

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We also achieved the shapes of the curves that were desired. The Sales curve forms the downward slope of the bell shaped curve created by our Bass Diffusion model. You can see from that the peak of the sales is on the first week then declines. We also achieved the proper curve for the Cumulative Sales which fit logarithmically. Analyzing our graphs also shows the importance of p and q. The higher the p values the faster the sales will reach its peak. Conversely, the lower the p the slower the rise. You can see this difference when comparing the graphs of Tomb Raider and GTA V. They both have similar q values but the p values change the Sales curve.

20 15 SALES 10

Grand Theft Auto V

25 20 15 10
20,159,798

N 0.83 p -0.31 q

5 0
Week 2 4 6 8 10 12

Sales

Cum. Sales

5
0

Week

14

16

18

20

22

24

1.2 1 0.8 SALES 0.6 0.4 0.2 0

Week 2 4

Tomb Raider

2.5 2 1.5 1
2,081,237

N 0.48 p -0.39 q

Sales

Cum. Sales

0.5
6 8 10 12 14 16 18 20 22 24

Week

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Using more of the graphs that we have created using our model, you can also see the significance of q. Comparing the graphs of The Last of Us to the graph of Fallout: New Vegas shows us that with more negative q values, the graphs would decrease more quickly and take less weeks to reach faster than a q value closer to 0 where the graph would decrease to faster.

1.4 1.2 1 SALES 0.8 0.6 0.4 0.2 0

Week 2 4 6

The Last of Us

Sales

Cum. Sales

10

12

14

16

18

20

22

24

4 3.5 3 2.5 2 1.5 1 0.5 0

3,643,830

N 0.35 p -0.25 q

Week 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Fallout: New Vegas

2.5 2
4,765,097

SALES

1.5
Sales

N 0.31 p -0.66 q

1 0.5

Week 2

10

Week

12

14

16

18

20

22

24

As you can see by comparing the two graphs, The Last of Us reaches at 22 weeks compared to Fallout: New Vegas which reached its at week 10. This is because differing q values.

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Our model could be extremely useful to professionals to accurately predict their video game sales. They could use our model to adjust their marketing campaigns to maximize their sales. For example, since we found Number of Pre-Orders to be significant in determine the number of sales, a company could encourage pre-orders with promotions. Aside from Marketing, our model could also help distributors decide how many copies of a game to create. Not only will companies be able to predict the future so they do not overproduce, they will be able to estimate the initial sale so they will not under produce and run out of copies of the game during the initial launch. Our model also gives the p and q values which show how gradually a companys sales will decline. Being able to use our model could also give companies the chance to calculate competitors sales. The only software that was required to build this model is a spreadsheet program with similar capabilities to Microsoft Excel or SPSS. You also need the data for Number of PreOrders and Average Rating which both can be taken from VGChartz.com for free. You would only need the spreadsheet program to run a regression analysis of your game to obtain the following variables: a: The intercept of the regression analysis b: The first variable of the regression analysis may be easily calculated using a calculator In the end our model is easy to work with as long as you have access to the required data. This makes our model useful for companies as most workers have access to calculators and a type of spreadsheet database. Our model would only require small instruction on how to run a regression using our spreadsheet program and the number of equations that are used to solve for variables.

Revisions for the Future

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There are many revisions that could be made to improve our Bass Diffusion model. I believe the biggest thing that could be improved and make our model more versatile would be finding a better way to calculate . With the equation that we are using now, we require that you must have the first ten weeks of sales data to perform a regression analysis to compute a and b which in turn are used to compute p and q. We also believe that with more significant factors our would have been more accurate to a wider variety of games. Many variables are significant when purchasing a video game other than Average Rating and Number of Pre-Orders. If we could find more factors that tested to be significant, we could obtain more data to tailor our video game sales how we want. Our initial goal, inspired by Ishiis paper, was to try and incorporate advertising into our model. However, we were unable to find an accurate way to measure advertising as well as a way to incorporate into our model. As stated in the previous revision, if we were able to obtain more data on sales our model could be more accurate. We were forced to make the assumption that each game stopped selling after ten weeks because the first ten weeks were the only sales information available to us from VGChartz.com. Our model shows that it takes more than ten weeks to reach , however we have no data to compare it to. If we had access to more weeks of sales our numbers could be tapered to be more accurate.

Conclusion
The goal for our project was to build a model that would predict how well a video game will sell as it is released. We started this process with a lot of research into different ways to predict future sales. With some great ideas from Akira Ishiis paper over modelling human dynamics in predicting movie sales, we stumbled upon the Bass Model. We then selected a large group of video games and began collecting, while researching how to calculate the proper

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variables needed for the Bass Diffusion model. After collecting data for a large number of variables, we used regression analysis in Microsoft Excel to determine which factors were significant. We also used regression on each game to determine a and b which determine p and q, factors of the Bass Diffusion model. By running another regression using only the variables that were significant, we were able to determine an equation that would calculate . Having this equation allowed us to calculate for each game and compare it to the games total sales. By dividing by the Total Sales of all games, we kept nine games in which our was pretty accurate. We then used a, b, and to calculate p and q. After attaining p and q, we were able to plug in all of our numbers into the equation for the Bass Diffusion model to create graphs that show the values that our model had predicted for sales of the game. Our group really learned a lot working on this project. I do not believe that anyone in our group has ever heard of a Bass Diffusion model before. Also, we had not used the Data Analysis add-in for Microsoft Excel before. There were many times during this project that we would reach a roadblock and have to rethink our approach. However, I believe that it was these roadblocks where we did our best brainstorming. I am thankful that we were able to choose something we all have a passion for, and I am very proud of our finished project.

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Bibliography
1. Babb, J. & Terry, N. (2013). Comparing Video Game Sales By Gaming Platform. Retrieved from: http://www.cis.wtamu.edu/home/index.php/swer/article/ viewFile/303/272. 2. Games: Improving the Economy." Theesa.com. Entertainment Software Association, n.d. Web. 07 Dec. 2013. 3. Ishii, Akira, et al. (2011). Mathematical Model for Hit Phenomena as Stochastic Process of Interactions of Human Interactions. Retrieved from: http://arxiv.org/ftp/arxiv/papers/1112/1112.1143.pdf. 4. Kurahashi, S. & Saito, M. (2011). An Analysis of Word-of-Mouth Effects on Social Networks. Retrieved from: http://computationalsocialscience.org/wp-content/ uploads/2011/10/kurahashi-saito-final.pdf. 5. Lilien, G. L., Ragaswamy, A., & De Bruyn, A. (2007). The Bass Model: Marketing Engineering Technical Note. Retrieved from: http://faculty.washington.edu/ sundar/NPM/BASS-Forecasting%20Model/ Bass%20Model%20Technical%20Note.pdf. 6. Siwek, Stephen, (2010). Video Games in the 21st Century: The 2010 Report. Retrieved from: http://www.theesa.com/facts/pdfs/videogames21stcentury_2010.pdf