CASE STUDY PRESENTATION

CASE STUDY PRESENTATION

Submitted By:Aayush Srivastava - 12/EE/89Shubam Kr Gupta 12/EE/54Anshu 12/EE/57Ravitej 12/EE/87Rishabh Kumar 12/EE/01Sourav Roy 12/EE/59Surajit Shah 12/EE/64Krishan Kant 12/EE/83Vishal Thakur 12/EE/77Chhandak Biswas 12/EE/78Pawan Kr Yadav 12/EE/81

A marketing manager who has to decide on pricing a new product is in a dilemma. His company has just developed a new customer product and it is to be introduced in the market. The manager has three options, viz, to adopt skim-pricing, penetration pricing, or fix the price of the new product somewhere in between the two extremes.The marketing manager knows that the desirability of fixing any of these three prices ultimately depends on the extent of demand for the new product. After considerable thought and consultations with his senior colleagues, he has developed the following pay-off table.TABLE: 1

Alternatives State of NatureLight Demand ( S1)Moderate Demand(S2)Heavy Demand( S3)Skimming Price A16030-30Intermediate Price A23060-15Penetration Price A3-30045Based on his past experience and knowledge of the possible substitutes for the new product, the marketing manager thinks that the probabilities of having (i) light demand (ii) moderate demand and (iii) heavy demand would be 0.5, 0.3 and 0.2 , respectively.QUESTIONS:What should be the choice of the marketing manager if his objective is to maximize the expected returns?What is the expected value of perfect information?

In the foregoing problem, suppose the marketing manager is inclined to undertake research so that additional information would enable him to price the new product under conditions of certainty. For this purpose, he wants to test-market the product. He is able to assign probabilities of achieving different test-market results, given that the product would ultimately have a particular level of demand. These probabilities are given in the table 2. TABLE 2 :Test MarketLight Demand S1Moderate Demand S2Heavy Demand S31. Unsuccessful0.50.30.22. Moderately Successful0.40.50.13. Highly successful0.20.20.6Conditional Probabilities of getting different test market results given each state of natureQuestions

What is the expected value of the proposed research?What is your advice to the marketing manager regarding the desirability or otherwise of undertaking marketing research? SOLUTIONStates of NatureLight Demand(S1)Moderate demand(S2)Heavy Demand(S3)Courses of ActionSkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Table showing PayoffCourses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.56030-30Moderate demand(S2)0.330600Heavy Demand(S3)0.2-30-1545Table showing Expected Payoff

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.53015-15Moderate demand(S2)0.39180Heavy Demand(S3)0.2-6-39Expected Monetary Value (EMV)3330-6Here we can observe that the first course of action i.e. A1 Skimming Price gives highest EMVTable showing Opportunity Loss

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.503090Moderate demand(S2)0.330060Heavy Demand(S3)0.275600Table showing Expected Opportunity Loss

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.501545Moderate demand(S2)0.39018Heavy Demand(S3)0.215120Expected Opportunity Loss (EOL)242763The first course of action also gives minimum EOLExpected Payoff with Perfect Information

States of NatureProbabilityMax Payoff for each State of NatureLight Demand(S1)0.56030Moderate demand(S2)0.36018Heavy Demand(S3)0.2459EPPI57Expected Value of Perfect InformationEVPI = EPPI - EMV(max)EVPI = 57 - 33 = 24 = EOLConditional Probabilities of Test MarketResults given each State of NatureConditional Probability P(A|Si)States of NatureProbability P(Si)UnsuccessfulModerately SuccessfulHighly SuccessfulLight Demand(S1)0.50.50.40.2Moderate demand(S2)0.30.30.50.2Heavy Demand(S3)0.20.20.10.6Calculation of Conditional Probabilitiesof State of Nature given Test Market using Bayes Theorem-1. Unsuccessful Test MarketStates of NatureProbability P(Si)P(Unsuccessful|Si)P(Si) x P(Unsuccessful|Si)P(Si|Unsuccessful)Light Demand(S1)0.50.50.250.6578Moderate demand(S2)0.30.30.090.2368Heavy Demand(S3)0.20.20.040.1052Sum = 0.382. Moderately Successful Test Market

States of NatureProbability P(Si)P(Moderately|Si)P(Si) x P(Moderately|Si)P(Si|Moderately)Light Demand(S1)0.50.40.20.5405Moderate demand(S2)0.30.50.150.4054Heavy Demand(S3)0.20.10.020.054Sum = 0.373. Highly Successful Test Market

States of NatureProbability P(Si)P(Highly|Si)P(Si) x P(Highly|Si)P(Si|Highly)Light Demand(S1)0.50.20.10.3504Moderate demand(S2)0.30.20.060.2142Heavy Demand(S3)0.20.60.120.4258Sum = 0.28Unsuccessful Test Market

Table showing Payoff

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.65786030-30Moderate demand(S2)0.236830600Heavy Demand(S3)0.1052-30-1545Table showing Expected PayoffCourses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.657839.46819.734-19.734Moderate demand(S2)0.23687.10414.2080Heavy Demand(S3)0.1052-3.156-1.5784.734Expected Monetary Value (EMV)43.41632.364-15Table showing Opportunity Loss

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.657803090Moderate demand(S2)0.236830060Heavy Demand(S3)0.105275600Table showing Expected Opportunity Loss

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.6578019.73459.202Moderate demand(S2)0.23687.104014.208Heavy Demand(S3)0.10527.896.3120Expected Opportunity Loss (EOL)14.99426.04673.41Expected Payoff with Perfect Information States of NatureProbabilityMax Payoff for each State of NatureLight Demand(S1)0.65786039.6Moderate demand(S2)0.23686014.4Heavy Demand(S3)0.1052454.5EPPI58.41Expected Value of Perfect Information EVPI = EPPI - EMV(max)EVPI = 58.41 - 43.416 = 14.994 = EOLModerately Successful Test Market Table showing Payoff

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.54056030-30Moderate demand(S2)0.405430600Heavy Demand(S3)0.054-30-1545Table showing Expected Payoff Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.540532.4316.215-16.215Moderate demand(S2)0.405412.16224.3240Heavy Demand(S3)0.054-1.62-0.812.43Expected Monetary Value (EMV)42.97239.729-13.785Table showing Opportunity Loss Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.540503090Moderate demand(S2)0.405430060Heavy Demand(S3)0.05475600Table showing Expected Opportunity Loss Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.5405016.21548.645Moderate demand(S2)0.405412.162024.324Heavy Demand(S3)0.0544.053.240Expected Opportunity Loss (EOL)16.21219.45572.969Expected Payoff with Perfect Information Expected Value of Perfect Information States of NatureProbabilityMax Payoff for each State of NatureLight Demand(S1)0.54056032.4Moderate demand(S2)0.40546024Heavy Demand(S3)0.054452.7EPPI59.18EVPI = EPPI - EMV(max)EVPI = 59.18 - 42.972 = 16.212 = EOLHighly Successful Test MarketTable showing Payoff

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.35046030-30Moderate demand(S2)0.214230600Heavy Demand(S3)0.4258-30-1545Table showing Expected Payoff

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.350421.02410.512-10.512Moderate demand(S2)0.21426.42612.8520Heavy Demand(S3)0.4258-12.774-6.38719.161Expected Monetary Value (EMV)14.67616.977-8.649Table showing Opportunity Loss

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.350403090Moderate demand(S2)0.214230060Heavy Demand(S3)0.425875600Table showing Expected Opportunity Loss

Courses of ActionStates of NatureProbabilitySkimming Price(A1)Intermediate Price(A2)Penetration Price(A3)Light Demand(S1)0.3504010.51231.536Moderate demand(S2)0.21426.426012.852Heavy Demand(S3)0.425831.93525.5480Expected Opportunity Loss (EOL)38.36136.0644.388Expected Payoff with Perfect Information

States of NatureProbabilityMax Payoff for each State of NatureLight Demand(S1)0.35046021.024Moderate demand(S2)0.21426012.852Heavy Demand(S3)0.42584519.161EPPI53.037Expected Value of Perfect InformationEVPI = EPPI - EMV(max)EVPI = 53.037 - 16.977 = 36.06 = EOLCONCLUSIONIf no research is undertaken, we see that the expected value of profit is Rs.33.If a survey is conducted with three test markets we see thatFor unsuccessful test market expected profit is Rs. 43.41.For moderately successful market expected profit is Rs. 43.97For highly successful market expected profit is Rs. 36.42.

Probability of different test marketsP (unsuccessful) = P (S1). P (unsuccessful/S1) + P (S2). P (unsuccessful/S2) + P (S3) P (unsuccessful/s3)= 0.5 x0.5 + 0.3x0.3 +0.2x0.2 = 0.38P (moderately successful) = P (S1). P (moderately successful/S1) + P (S2). P (moderately successfully/S2) +P (S3) P (moderately successful/s3)= 0.5 x0.4 + 0.3x0.5 + 0.6 x 0.2 = 0.28P (highly successful) = P (S1). P (highly successful/S1) + P (S2). P (highly successful/S2) + P (S3) P (highly successful/s3)= 0.5 x0.2 + 0.3x0.2 + 0.6 x 0.2 = 0.28Combined profit after research = 0.38 x 43.41 + 0.37 x 42.87 + 0.28 x 17.17 =Rs. 37.19Profit after research increases by Rs 37.19 - 33 = Rs 4.19As profit increases by RS. 4.14 after research so, research should be undertaken.

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