You are the marketing manager of a company that is introducing (i.e., launching)

Question

You are the marketing manager of a company that is introducing (i.e., launching) a new lithium-ion battery-powered electric mower to the market. You must decide on a marketing course of action for the launch. The options being considered include: introducing the lawn mower with extremely limited promotion, introducing the mower with a moderate (or "average") level of promotion, or launching the mower with a high ("intensive") level of marketing promotion The estimated profits (or payoffs, $) to the company from the introduction are expected to depend significantly on the state of the economy. Three economic scenarios or conditions around the time of the product launch are being considered: the economy is declining, the economy is stable (i.e., no change), and the economy is expanding. The payoffs corresponding to the 3 marketing introduction options and economic conditions are shown in the table below (notice that the marketing options are the columns and the economic conditions are the rows) Payoff Table Marketing alternative Economic condition S1 (declining) S2 (stable) S3 (expanding) 4,000 A1: LimitedA2: Moderate A3: Intensive promotion 1,000 2,000 promotion -4,000 4,000 10,000 promotion 14,000 2,000 40,000 Probabilities 0.3 0.6 For Questions 1 through 6, assume that the marketing manager assigns the following probabilities to each economic condition Pr(declining) = 0.30 Pr(stable) = 0.50 Pr(expanding) = 0.20

Explanation / Answer

1) Maximin = Determine the worst possible payoff for each alternative, and choose the alternative that has the “best worst.”

S1 = -14000

S2 = -2000

S3 = 4000

Ans - S3, Payoff = 4000

2) Minimax regret = Determine the worst regret for each alternative, and choose the alternative with the “best worst.” To do this, subtract every payoff in each column from the best payoff in that column.

S1 = 54000

S2 = 42000

S3 = 0

The lowest regret is for S3, Maximum regret = 54000

3) Maximax = Determine the best possible payoff, and choose the alternative with that payoff.

S1 = 1000

S2 = 4000

S3 = 40000

Ans S3, Payoff = 40000

4) EMV = SUMPRODUCT of Value*Probability

A1 = 1000*0.3 + 2000*0.5 + 4000*0.2= 2100

A2 = -4000*0.3 + 4000*0.5 + 10000*0.2 = 2800

A3 = -14000*0.3 + -2000*0.5 + 40000*0.2 = 2800

A1 A2 A3 S1 3000 14000 54000 S2 2000 6000 42000 S3 0 0 0

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