Class Outline

1.Video on Advertising Jello **Reminder**

2. Class Discussion on Optical Distortion Inc.

3. Practice in Decision Analysis

4. Hand out last year's midterm

Optical Distortion Incorporated

• How was the idea for the product enerated?

• What were some initial problems?

• What is the potential market for this roduct?

• What makes it easy / hard to predict demand?

Pricing

• How much would you charge for these lenses?

• What is the lowest price ODI could charge and still make money?

• What is the highest price ODI could possibly get away with charging? (What determines the upper bound?)

What is the most that farmers would pay?:value of saved chickens, extra eggs, and saved food

• murder rate (debeaked) = 9% / yr

• murder rate (lenses) = 4.5% / yr

• cost of egg laying hen = $2.40

• trauma from debeaking results in one fewer egg laid

• farmers get 53¢ for a dozen eggs

• total food consumed & spilled per day with 2' deep trough = 0.245 pounds

• total food consumed & spilled per day with 1' deep trough = 0.237 pounds

• with "lensed" chickens, food trough can be 3/8 of an inch less deep

• chicken feed = $158 a ton

How much are the lenses worth to farmers?

BENEFITS

•Fewer homicides

•No debeaking trauma

•Feed Savings

ECONOMIC VALUE

$2.40 * (9%-4.5%) = 10.8 ¢

1 extra egg * (53¢ / 12) = 4.5 ¢

(0.245 -0.237) * 3/8 * ($158 / 2000) * 365 = 8.7 ¢

TOTAL SAVINGS 10.8 ¢ + 4.5 ¢ + 8.7 ¢ = 24 ¢

What is the optimal pricing strategy?

3¢ < p* <24¢

•What are the advantages of a low price? •What are the advantages of a high price?

Would now be a good time to sell company?

• Resources that ODI has– Patent +

– contract with New World Plastics

– = exclusive access to a gigantic market

• Resources ODI lacks– cash

– sales force

6 factors affecting the diffusion of technology:The "ACCORD" model

• Advantage of the product over that it replaces

• Complexity (or perceived complexity)

• Compatibility (with present behavior patterns)

• Observability (of benefits to others)

• Risk (of adopting the new technology)

• Divisibility (can it be tried on a limited basis?)

• How easy will it be to generate positive "buzz"?

The diffusion of innovation

# of consumers who have adopted

by time "t"

Technology Adoption Life Cycle

The

Chasm

Visionaries Pragmatists Conservatives Skeptics Innovators Early Majority Late Majority Laggards

calculating expected value (EV) &expected value of perfect information (EVPI)

Last Year's Midterm Problem

Another example

.7 * $6 = (4.2) + .3 *.5 * $12 = (1.8) + .3 * .5 * -$10 = (-1.5) = 4.5

$4.5 (with research) – $1 (without research) = $3.5

Another example

.7 * $8 = (5.6) + .3 *.1 * $46 = (1.38) + .3 * .9 * -$4 = (-1.08) = 5.9

5.9 (with research) – 2 (without research) = 3.9