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Decision Analysis: Product Development and Probability Assessment

A problem focused on decision analysis techniques for product launch strategies aimed at maximizing profits.

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    Decision Analysis: Product Development and Probability Assessment Suppose that there is a 60% probability that the product will be a success on the market (that means, the probability of failure is 40%). If the product is a success, you will get a profit of $200,000, and if it is a failure, you will incur a loss of $100,000. Should you develop this product? How do you make a decision in this situation? Also, how can one come up with the probability of success (or failure)? Share your ideas/thoughts with the other students and comment on theirs. Solution . Denote by X the gain of the product. As we are given that when the product is a success, we will get a profit of $200,000, and if it is a failure, we will incur a loss of $100,000 . So, it gives the following probability distribution X=x $200,000 - $100,000 P(X=x) 60% 40% In this question, as X is a random variable, we can only use the expect ed value E(X) to make a decision. When E(X)>0, we will develop the product. When E(X)  0, we will not develop the product. Now we need to compute the expected value for X. Using a formula:  = = i i i x X P x X E ) ( ) ( , we get 000 , 80 $ 40 . 0 ) 000 , 100 $ ( 60 . 0 000 , 200 $ ) ( ) ( =  − +  = = =  i i i x X P x X E As the expected value 0 000 , 80 $ ) (  = X E , we should develop this product. To come up with the probability of success (or failure) , one can give a survey (questionnaire) to customers to see how likely they will purchase this product when it is on the market. We can calculate the percentage of customers in the survey who would purchase this product. This percentage p could be used as the probability of success . Then 1 - p would be the probability of failure.

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