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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 AssessmentSuppose that there is a 60% probability that the product will be a success on themarket (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 thissituation? 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 whentheproduct is a success,wewill get a profit of $200,000, and if it is a failure,wewillincur a loss of $100,000. So, it gives the following probability distributionX=x$200,000-$100,000P(X=x)60%40%In this question, as X is a random variable, we can only use the expected valueE(X) to make a decision. When E(X)>0, we will developthe product.WhenE(X)0, we will not develop the product.Nowweneed tocompute the expected value for X. Using a formula:==iiixXPxXE)()(, we get000,80$40.0)000,100$(60.0000,200$)()(=−+===iiixXPxXEAs the expected value0000,80$)(=XE, we should develop this product.Tocome up with the probability of success (or failure), one can give a survey(questionnaire) to customers to see how likely they will purchase this productwhen itison the market. We can calculate the percentage of customers in thesurvey who would purchase this product. This percentage p could be used astheprobability of success. Then 1-p would be the probability of failure.

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