Using Rates as Stand Alone Measures of Performance! Ted Mitchell
Transcript
Slide 1
Using Rates as Stand Alone Measures of Performance! Ted
Mitchell
Slide 2
You own a car Last month you got 30 miles per gallon. From this
information can I tell how many miles you drove last month? From
this information can I tell how many gallons of gas you used last
month? Knowing the miles per gallon tells me nothing about the
distance you travelled or the number of gallons you used.
Slide 3
Two Exam questions Biz-Caf #1 is selling coffee at a rate of 18
cups per hour. 1) How many hours a week was it open? 2) How many
cups did it sell last week? Knowing the Rate of Sales tells you
nothing about the amount of coffee sold or the number of hours the
caf was open!
Slide 4
You have a car and You consider it to be a Two Factor Machine
That converts an Input to an Output. You got 30 miles per gallon.
What was the Output from your car/machine? What was the Input into
your car/machine?
Slide 5
Car as a Two-Factor Machine Output: Distance in Miles=
(conversion rate, r)x (Input: Gallons of Gas) Miles Travelled = 30
miles per gallon x (number of gallons) The rate of 30 miles per
gallon implies the output and the input 30 units of output per one
unit of input Rate is the output/input Rate is the miles/gallons,
Rate is miles per gallon, mpg
Slide 6
We use rates and ratios to describe Business machines because
the rates and ratios provide us with a short-hand description of a
simple machines output and input! Conversion rate or Efficiency
ratio Output Input Customers per day Sales per call Profit per sale
Servers per hour Sales per Salesman
Slide 7
We use rates and ratios to describe Business machines because
the rates and ratios provide us with a description of a simple
machines output and input! Conversion rate or Efficiency ratio
Output Input Customers per dayNumber of customers Sales per
callNumber of sales or orders Profit per saleDollars of profit
Servers per hourNumber of servers Sales per SalesmanNumber of sales
or transactions
Slide 8
We use rates and ratios to describe Business machines because
the rates and ratios provide us with a description of a simple
machines output and input! Rate = Output / Input Conversion rate or
Efficiency ratio Output Input Customers per dayNumber of
customersNumber of days Sales per callNumber of salesNumber of
calls Profit per saleDollars of profitNumber of sales Servers per
hourNumber of serversNumber of hours Sales per SalesmanNumber of
salesNumber of salesmen
Slide 9
You have a second version car and You consider it to be a Two
Factor machine That converts an input to an output. You travel at a
speed of 80 miles per hour. What was the output from your
car/machine? What was the input to your car/machine? Output:
Distance Travelled in Miles = (conversion rate, r) x (Input hours
travelled) Conversion rate: Output/Input Conversion rate = miles /
hour, Conversion rate = miles per hour, mph
Slide 10
Inputs and Outputs Can be very abstract Hours (measures of
time) Awareness (measures of cognition) Loyalty (measures of
commitment) Preference (measures of desire) Attention episodes
Convenience (measures of utility)
Slide 11
Two More Exam questions Biz-Caf #1 is selling coffee at a rate
of 18 cups per hour. 1) When Biz-Caf #1 is visualized as a
marketing machine, what is the machines output? Output: Quantity of
cups of coffee sold, Q 2) When Biz-Caf #1 is visualized as a
marketing machine, what is the input to the machine? Input: Number
of Hours of Store Operation, H 18 units of output per 1 unit of
input
Slide 12
Sometimes Rates are Ambiguous Rate or ratioOutputInput %
Markup??? % Interest rate??? Return on Advertising Dollars, Calls,
HitsDollars, insertions Advertising to Sales??? Return on
Sales???
Slide 13
Sometimes Rates are Ambiguous Rate or ratioOutputInput %
MarkupDollar profit per unitRevenue from a unit sale, Price %
Interest rateInterest paymentprinciple Return on Advertising
Dollars, Calls, HitsDollars, insertions % Advertising to Sales
Advertising dollarsDollars of revenue % Return on SalesDollars of
Net profitDollars of Revenue
Slide 14
Before You Calculate 1) Know the complete description of the
machines factors and the output of the machine Output = Conversion
rate x Input 2) Get rid of the percents
Slide 15
Basic Two-Factor Marketing Machine? Biz-Caf #1 Input : Hours
open, H Observation:1 12 hours Conversion rate: cups sold per hour
r = Q/H Output : Cups sold, Q Observation:2, 016 cups
Slide 16
Two Factor Model of Biz-Cafe As a marketing machine that
converts hours of operation, H, into cups of coffee sold, Q.
Output: cups of coffee = ( conversion rate, r ) x (Input: the
number of hours of operation) You have observed Biz-Caf #1 selling
2,016 cups a week when it was open for 112 hours What is the
conversion rate of the Biz-Caf Machine #1? Conversion rate, r =
Output/Input Conversion rate, r = 2,016 cups/112 hours Conversion
rate, r = 18 cups per hour
Slide 17
Basic Two-Factor Marketing Machine? Biz-Caf #1Calibration
Input: Hours open, H Observation:1 12 hours Conversion rate: cups
sold per hour r = Q/H Calculation Q/H = 2,016 cups/112 hours = 18
cups per hour Cups sold, QObservation:2, 016 cups
Slide 18
Can you use a Calibrated Two-Factor marketing machine for
Forecasting? Answer: YES!
Slide 19
Basic Two-Factor Marketing Machine? Biz-Caf
#1CalibrationForecast Output Input: Hours open, H Observation:1 12
hours Proposed Input, H Conversion rate: cups sold per hour r = Q/H
Calculation Q/H = 2,016 cups/112 hours = 18 cups per hour 18 cups
per hour Cups sold, QObservation:2, 016 cups Forecast, Q = 18 cph x
Input
Slide 20
Will it be a good forecast? With only a single performance
having been observed and used for the machines calibration it is
NOT likely to be a very accurate forecast
Slide 21
Improving the Forecasting accuracy requires two or more
observations Performance #1 Performance # 2 Meta- Marketing Machine
forecasting Slope- Intercept Machine forecasting Hours open, H
H1H2H = H2 - H1 Proposed H Conversion rate r = Q1/Q1r = Q2/H2m =
Q/H a + m(H) Quantity sold, Q Q1Q2Q = Q2 - Q1 Forecasted Q
Slide 22
Six Exam Questions Biz-Caf run by student #1 is selling coffee
at a rate of 18 cups per hour Biz-Caf run by student #2 is selling
coffee at a rate of 22 cups per hour. 1) Which caf is open longer?
2) Which caf is selling more coffee? 3) Is it safe to assume that
both students sold the same amount of coffee? 4) Is it safe to
assume that both cafes were open for the same number of hours? 5)
Did caf #1 sell less cups than caf #2? 6) Did Caf #2 stay open more
hours than caf #1?
Slide 23
What is the average rate? Biz-Caf #1Biz-Caf #2 Hours open, H
Conversion rate: cups sold per hour r = Q/H 18 cups per hour 22
cups per hour Average rate is??? Cups sold, Q
Slide 24
Two Exam Questions Biz-Caf run by student #1 is selling coffee
at a rate of 18 cups per hour Biz-Caf run by student #2 is selling
coffee at a rate of 22 cups per hour. 1) What is the average rate
at which the two cafes are selling coffee? 2) How much information
do you need to calculate the average rate of the two cafes?
Slide 25
What is the average rate? Biz-Caf #1Biz-Caf #2Average Hours
open, H Need Total Input Conversion rate: cups sold per hour r =
Q/H 18 cups per hour 22 cups per hour Not 20 cups per hour Cups
sold, Q Need Total Output
Slide 26
Is there any useful information in the knowledge of cups per
hour??? Biz-Caf run by student #1 is selling coffee at a rate of 18
cups per hour Biz-Caf run by student #2 is selling coffee at a rate
of 22 cups per hour. 1) Which caf is more efficient at converting
hours of operation into cups sold
Slide 27
What can you say? Biz-Caf #1Biz-Caf #2Difference Hours open, H
Conversion rate: cups sold per hour r = Q/H 18 cups per hour 22
cups per hour #2 is more efficient Cups sold, Q
Slide 28
Knowing the machines efficiency Tells us nothing about the
machines relative performance in terms of output and input Do N OT
assume that higher efficiency resulted in higher levels of output
or less amounts of input You need more information! The machine is
an identity if you know one more piece of information you can
calculate the third!
Slide 29
Need the Full Description? Biz-Caf #1Biz-Caf #2Difference Hours
open, H112 hours80 hours H = -32 H Conversion rate: cups sold per
hour r = Q/H 18 cups per hour 22 cups per hour r = +4 cph Cups
sold, Q2,016 cups1,760 cups Q = -256 cups
Slide 30
Avoid making Dumb assumptions? Biz-Caf #1Biz-Caf #2Difference
Hours open, H112 hours80 hours H = -32 H Conversion rate: cups sold
per hour r = Q/H 18 cups per hour 22 cups per hour r = +4 cph Cups
sold, Q2,016 cups1,760 cups Q = -256 cups You can NOT assume that a
higher efficiency resulted in a larger output!
Slide 31
In finance and investing it is common To adopt a policy
choosing investments or projects based on the largest projected
rate of return (IRR) An investment policy of maximizing the rate of
return is valid if and only if the projects have the same capital
requirements (inputs) and risk In marketing it is invariably wrong
to follow a policy of maximizing a rate of return if the goal is to
maximize the size of the return
Slide 32
Avoid making Dumb assumptions? Biz-Caf #1Biz-Caf #2Difference
Hours open, H112 hours80 hours H = -32 H Conversion rate: cups sold
per hour r = Q/H 18 cups per hour 22 cups per hour r = +4 cph Cups
sold, Q2,016 cups1,760 cups Q = -256 cups Do NOT blindly adopt
policies of maximizing a rate of return if the goal is maximize the
return
Slide 33
To compare performances Of two machines and use the differences
between them for diagnostic purposes You must have the description
of the machines two factors of production and their outputs
Slide 34
Rules for Rates and Ratios 1) Do NOT use rates and ratios as
stand alone measures of performance 2) Do NOT assume the inputs
and/or the outputs are equal or constant 3) Do NOT calculate the
average rate as the simple mean of the rates involved 4) Do NOT
assume that a performance with a higher rate of efficiency must
have a higher level of output 5) Do NOT adopt a policy of
maximizing a rate of return when choosing between machines when the
goal is to maximize marketing output
Slide 35
DO NOT use Rates as Stand Alone Measures of Performance! Ted
Mitchell