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Decision Tree Analysis for Product Launch

1) A company has developed a new product with a 40% chance of successful launch yielding $2 million profit, or 60% chance of failure with $300k loss. 2) The options are to drop the idea, launch immediately, or try a test market for $40k. 3) A decision tree analysis estimates the expected monetary value (EMV) of each option, finding that trying a test market has only slightly lower EMV than immediate launch (-$5k) but much lower risk (-$95k).

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Mehmet Zirek
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129 views5 pages

Decision Tree Analysis for Product Launch

1) A company has developed a new product with a 40% chance of successful launch yielding $2 million profit, or 60% chance of failure with $300k loss. 2) The options are to drop the idea, launch immediately, or try a test market for $40k. 3) A decision tree analysis estimates the expected monetary value (EMV) of each option, finding that trying a test market has only slightly lower EMV than immediate launch (-$5k) but much lower risk (-$95k).

Uploaded by

Mehmet Zirek
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Decision Tree Case Study

A new product has been developed by a company and


preliminary marketing potential has been estimated as a
chance of 40% (0.4 probability value) for successful
launch which would result in annual profit with net
present value 2,000,000 EUR and failure would mean a
loss of 300,000 EUR.
Options
Drop the idea
Launch immediately
Try in a test market (cost 40.000)
Case Study
Possible test results
(a)less than 10% of the public decided to test (we should think of dropping the idea)
(b)more than 10% of public decided to test but less than 25% of those who try
decide to buy on a second or subsequent occasion
(c)more than 10% of public decided to test and repeat purchase rate is 25% or more

Based on subjective estimates of experts:


(a) has prob. 0.5, (b) has prob. 0.25 and (c) has prob. 0.25
Test market response
(a) (b) (c)
Success (S) 0.1 0.4 1.0
Failure 0.9 0.6 0.0
Decision Tree

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Decision Tree Analysis

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Decision Strategy Not launched due
to negative EMV
therefore final
Decision scenarios expected monetary
1 – Drop : EMV = 0 value is
1–2 : EMV= 620,000

1 – 3 -4 –Drop : EMV =-40,000 or Launch: EMV = -70,000 0,5 0


1 – 3 -5 –Drop : EMV =-40,000 or Launch: EMV = 620,000 0,25 155,000 EMV: 615,000
1 – 3 -6 –Drop : EMV =-40,000 or Launch: EMV = 2,000,000 0,25 500,000 (655K-40K)

Risks
1-2 EMV 620,000 Risk is -180,000
1-3 EMV 615,000 Risk is -45,000-40,000 (you can also add the = - 85,000

Conclusion:
WITH LESS THAN 1% DECREASE IN YOUR EXPECTED MONETARY VALUE (615K instead of 620K)
YOU CAN DECREASE YOUR RISK SUBSTANTIALLY (-180K to -85K)
Recommended Action: TRY IN THE TEST MARKET

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