Example #4: New Product Introduction with Competition (Profit Search)

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In the previous example, RCA was interested in creating mid-sized televisions to compete with JVC and Sony, where each competitor already offered two products. We searched for an optimal configuration for the best single and pair of RCA televisions to offer, relative to the competition, to maximize revenue. However, the fundamental weakness of the approach is that there is no guarantee that following the search recommendations is a profitable strategy for RCA.

 

In this example, we include the critical aspect of costs. Let’s assume that RCA is able to provide a basic fixed cost structure for including various features in these mid-sized television sets:                        

 

Base Cost:

$180

Screen Size:

  25" screen

  26" screen

  27" screen

 

+$0

+$20

+$35

Sound Quality:

  Mono sound

  Stereo sound

  Surround sound

 

+$0

+$25

+$40

Channel Blockout:

  No channel blockout

  Channel blockout

 

+$0

+$15

Picture-in-picture:

  No picture in picture

  Picture in picture

 

+$0

+$30

 

The ASM lets you add cost tables wherein you can specify costs for one attribute at a time, or multiple attributes at a time, if the costs interact with multiple attributes (e.g. if the cost for PIP depends on what screen size is offered). In our example above, there are no interdependencies for costs.

 

To specify cost tables, from the Home tab, click the Revenues and Costs option on the ribbon within the Project Information group. Then, click Cost Tables and then the Add button to Add costs per attribute level.

 

There isn't a place to add Base Cost into the ASM cost tables, so we can just add $180 to the JVC brand.  Since we're not interested in computing profit for RCA or Sony, we can leave the costs blank for those brands.  Add new tables to specify the costs for the other attributes, as per the table directly above.

 

Specifying the Products

 

Product #1

Product #2

Product #3

Product #4

Product #5

Product #6

 

JVC

25" screen

Mono sound

No blockout

No PIP

$300

 

JVC

26" screen

Stereo sound

Blockout

No PIP

$350

 

Sony

26" screen

Stereo sound

No blockout

PIP

$350

 

Sony

27" screen

Surround sound

Blockout

PIP

$450

 

RCA

1-3

1-3

1-2

1-2

=Range(300,450,5)

 

RCA

1-3

1-3

1-2

1-2

=Range(300,450,5)

 

Simulation Method: Randomized First Choice (click the gear_blue icon to specify that 50 iterations should be used per respondent, to make things run faster for this example)

Range Behavior:  Grid, optimizing Revenue (click the gear_blue icon to specify Profit as the single objective)

 

After several minutes, the optimal 2 products found for JVC (net profits across both products) are given as follows:

 

Product #5

Product #6

 

RCA

26" screen

Stereo sound

Blockout

PIP

$315

 

RCA

27" screen

Surround sound

Blockout

PIP

$370

 

Profit is maximized at $133MM by offering a full-featured TV at $370 (undercutting the price for Sony’s identically full-featured TV selling for $450) and another less fully featured TV at $315.

Page link: http://www.sawtoothsoftware.com/help/lighthouse-studio/manual/index.html?search-example-4.html