Marketing Models

Assignment 6
Individual Assignment on Zach’s Garage Case
Submitted by: Sadia Anwar (21110094)
Introduction:
Zach is a 52 year old accounting business owner and is a big fan of ‘dark metal
music’. For his love for the art decided to give young bands a place for
showcasing their talent. He opened up a garage where bands
could play for free and their fans could attend for free as well.
However, since the turnout of the audience and the bands turned out to
be a lot more than what he had expected and he had started incurring
costs up to $3000 for a month which were more than what he could
manage on his own.
Although, the idea of charging the audience did not excite him but he realized it
was the only way to at least fund the fixed costs.
PRICE OPTIMIZATION ASSUMPTIONS
• The 6 levels of price that used in this price optimization are $1, $3, $5, $8, $12
and $20 and are used to understand what the audience would be willing to pay
for the concerts in terms of rating these prices from 1 to 5. (5 being the most
desirable and 1 being the least)
• The above mentioned probabilities that were previously suggested for option 1 to
5 were 0%, 0%, 10%, 40% and 100%. These were identified to be overestimated
hence the new probabilities that were recorded were 0%, 0%, 10%, 30% and 70%.
MAXIMIZING THE PROFITS
The company should target 43% of the total population of Mid
West to maximize its profits.
Link to excel solution below:
We assumed a response rate of 9.03%, the same as the holdout Given Information Choice Logit Score Decile Score Logit No. of People Targeted No. of People Who Will Buy Profit

sample. Total Customers

Buying Rate
Potential Buyers
Cost per person Targeted
Revenue per person who buys
50000
9.03%
4515
$ 0.60
$ 10.60
0
1
1
1
1
0
1
1
0.966183339
0.951237398
0.937232855
0.91906422
0.917010133
0.908328953
0.901907407
0.899212043
1%
2%
3%
4%
5%
6%
7%
8%
8.82%
14.22%
19.12%
23.53%
25.49%
29.41%
31.37%
35.78%
500
1000
1500
2000
2500
3000
3500
4000
398
642
863
1062
1151
1328
1416
1616
$
$
$
$
$
$
$
$
3,922.9
6,203.5
8,249.5
10,060.9
10,699.4
12,276.2
12,914.6
14,726.0
P
30000

25000

r 20000
o
1 0.89626532 9% 38.73% 4500 1748 $ 15,833.6 15000

We also divided the decile score to 100 segments rather than 10,
f
1 0.890757301 10% 42.16% 5000 1903 $ 17,175.9
1 0.890465033 11% 46.08% 5500 2080 $ 18,752.7 i 10000
0 0.887104482 12% 47.55% 6000 2147 $ 19,156.5 t 5000
1 0.862925052 13% 49.51% 6500 2235 $ 19,794.9
0 0.850305609 14% 51.47% 7000 2324 $ 20,433.3 0

1%
7%
1 0.846615656 15% 51.96% 7500 2346 $ 20,367.9
1 0.846498748 16% 53.43% 8000 2412 $ 20,771.7
1 0.846199651 17% 53.92% 8500 2435 $ 20,706.3
1 0.840908052 18% 55.88% 9000 2523 $ 21,344.7

to make our estimate more accurate.

1 0.82668314 19% 57.35% 9500 2589 $ 21,748.5
0 0.822619993 20% 58.82% 10000 2656 $ 22,152.4
1 0.820229037 21% 60.78% 10500 2744 $ 22,790.8
1 0.811639715 22% 61.27% 11000 2767 $ 22,725.4
1 0.810705369 23% 63.73% 11500 2877 $ 23,598.4
0 0.805542135 24% 64.22% 12000 2899 $ 23,533.0
1 0.803371329 25% 66.18% 12500 2988 $ 24,171.4
1 0.801659706 26% 67.16% 13000 3032 $ 24,340.6
1 0.801580193 27% 68.14% 13500 3076 $ 24,509.8
1 0.797638535 28% 69.12% 14000 3121 $ 24,679.0

We calculated logit based on the holdout sample, to see what

0 0.795759698 29% 71.08% 14500 3209 $ 25,317.4
0 0.794962165 30% 71.08% 15000 3209 $ 25,017.4
1 0.794603338 31% 72.06% 15500 3253 $ 25,186.6
1 0.794374752 32% 72.55% 16000 3276 $ 25,121.2
0 0.792654343 33% 73.04% 16500 3298 $ 25,055.8
0 0.790128475 34% 74.02% 17000 3342 $ 25,225.0
1 0.788632149 35% 75.00% 17500 3386 $ 25,394.3
1 0.773783568 36% 75.98% 18000 3431 $ 25,563.5
0 0.771482289 37% 76.47% 18500 3453 $ 25,498.1
0 0.76124185 38% 77.45% 19000 3497 $ 25,667.3

percentage of people would be interested in buying the companies

0 0.75751436 39% 78.43% 19500 3541 $ 25,836.5
1 0.75591271 40% 79.41% 20000 3585 $ 26,005.7
1 0.754452146 41% 80.88% 20500 3652 $ 26,409.5
0 0.750053942 42% 82.35% 21000 3718 $ 26,813.3
0 0.748664076 43% 83.33% 21500 3763 $ 26,982.5
0 0.748249884 44% 83.82% 22000 3785 $ 26,917.1
1 0.743377909 45% 83.82% 22500 3785 $ 26,617.1
0 0.741484768 46% 84.31% 23000 3807 $ 26,551.7
0 0.740698081 47% 84.31% 23500 3807 $ 26,251.7

product.
0 0.735867655 48% 84.31% 24000 3807 $ 25,951.7
0 0.731530186 49% 85.29% 24500 3851 $ 26,120.9
0 0.730940595 50% 85.29% 25000 3851 $ 25,820.9
1 0.728059602 51% 85.29% 25500 3851 $ 25,520.9
1 0.727445403 52% 85.29% 26000 3851 $ 25,220.9
1 0.727385919 53% 85.29% 26500 3851 $ 24,920.9
0 0.726035425 54% 86.27% 27000 3895 $ 25,090.1
0 0.718351669 55% 87.25% 27500 3940 $ 25,259.3
1 0.716527193 56% 87.25% 28000 3940 $ 24,959.3
0 0.715429086 57% 87.25% 28500 3940 $ 24,659.3

As the response rate was set to be 9.03%, maximum number of

1 0.714165142 58% 87.75% 29000 3962 $ 24,593.9
0 0.713511468 59% 88.24% 29500 3984 $ 24,528.5
1 0.709117122 60% 88.24% 30000 3984 $ 24,228.5
0 0.705411115 61% 90.20% 30500 4072 $ 24,866.9
0 0.704204404 62% 90.20% 31000 4072 $ 24,566.9
0 0.701719619 63% 90.69% 31500 4094 $ 24,501.5
1 0.700839776 64% 90.69% 32000 4094 $ 24,201.5
0 0.69466072 65% 90.69% 32500 4094 $ 23,901.5
1 0.690786751 66% 90.69% 33000 4094 $ 23,601.5

buyers for the whole population was 4515, even if we targeted

1 0.689760531 67% 92.16% 33500 4161 $ 24,005.4
1 0.688303518 68% 92.65% 34000 4183 $ 23,940.0
0 0.686067925 69% 93.14% 34500 4205 $ 23,874.6
0 0.682654979 70% 94.12% 35000 4249 $ 24,043.8
0 0.682459973 71% 94.61% 35500 4272 $ 23,978.4
0 0.682199866 72% 94.61% 36000 4272 $ 23,678.4
0 0.680832441 73% 95.59% 36500 4316 $ 23,847.6

everyone.
We then multiplied our logit (%) with our maximum potential
buyers to see how many people do we expect to buy from us.
During this we also assumed there would only be a maximum of 1
sale from each customer.
Our profit was calculated by multiplying margin with expected sales, and then subtracting the cost of mailing and the product of number of people targeted.
Our graph shows us a peak value of profit is seen when we target 43% of the population:

Profit
$30,000.0

$25,000.0

$20,000.0

P
r $15,000.0
o Profit
f
i $10,000.0
t

$5,000.0

$-
1% 4% 7 % 10 % 13 % 16 % 1 9 % 2 2 % 2 5 % 28 % 3 1 % 34 % 37 % 40 % 43 % 46 % 49 % 5 2 % 5 5 % 5 8 % 6 1 % 6 4 % 67 % 7 0 % 73 % 76 % 79 % 82 % 85 % 88 % 9 1 % 9 4 % 9 7 % 0 0 %
1

Decile Score
PROBLEMS WITH REPEATED SCORING
RULE:
• Potential customers were ignored because they were never mailed.
• 20 and 21 books ranked differently and trivial difference in real life situations
• Adverse affect on long term profitability due to degeneration of customer
database.

Suggestion:
• Use alternative approach of contacting less frequent customers instead of only
contacting frequent customers and completely ignoring less frequent customers.