Important Email #1
Assigned September 13, 2012.
Due by 5:00 PM on October 5, 2012.
Any changes made to these instructions after the 9/20 class will be shown in red.
Quick Comment
These are real data you are analyzing for a real potential product.
What you are hired to do
You work for Norwood Consulting, Inc., a consulting company that specializing in data analysis for agribusinesses. A company named Premiur Beef has been establishing a new beef product called Guaranteed Tender Steaks (GT). As the name implies, these are Choice grade steaks which have been tested to ensure tenderness. It costs the company $X per pound to identify, segregate, and promote GT steaks, and this is the cost of selling GT steaks over regular steaks. You have encountered this cost in Homework 4, which gives you an estimate of X. Thus, the company knows it needs to charge more than a $X per pound premium for GT steaks, but what premium is best? That is what you are hired to answer.
The company has collected these data on the value individuals place on GT steaks. These data come from actual experiments in a Kansas grocery store where 58 people revealed how much more of their own, real money they would pay for GT steaks, over the cost of regular Choice steaks. For example, the first two individuals have a willingness-to-pay (WTP) of $0.00, which means they will not pay one penny more for a GT stead. If everyone's WTP was zero then the company would lose money selling GT steaks, but many people do value tenderness. The third person's WTP is $2.00, which means they will pay up to $2.00 more for a GT steak. This person would certainly pay $0.15, $0.50, $1.50, or even $1.99 for a GT steak, but not a penny more than $2.00.
To repeat, your job is to help the company determing if selling GT steaks is a profitable venture, and if it is, to identify the premium it should charge for GT steaks.
Suggestions
You must independently think through this problem to arrive at a solution, but here are some hints.
- First, you should definitely construct a histogram of the WTP numbers, as it gives a nice picture of the variability in people's value placed on GT steaks. The percentages associated with the histogram are also useful for answering the question.
- How to calculating the best premium? First assume the company wishes to maximize profits. The profits (ignoring fixed costs) they make for any particular premium equals: profits = (premium charged - $X)(number of steaks sold). A higher premium lets the firm make more money on each steak sold but reduces the number of steaks they sell. If the company cannot charge anyone a premium over $X, it cannot profitably sell the steaks.
- You might want to conduct a thought experiment, where you assume1,000 people go to the store to purchase a Choice steak. They see the premium. If their WTP is greater than the premium they buy the GT steak. Otherwise they purchase the regular Choice steak. Of the 1,000 people, and at any premium, what percent buy the GT steak? Answer: the percent of people whose WTP is greater than the premium. This thought experiment may not be the only thing that matters in determining a profit-maximizing premium, but it could certainly be a major part of the analysis.
Your answer should be submitted as
- An email addressed to bailey.norwoodCLASS@gmail.com. Only this email should be used to submit the project and only to this address. It should contain a pdf copy of your letter, a pdf copy of your histogram, and a copy of the Excel file containing your work. The body of the email should contain the narrative in your letter.
- A pdf coA pdf copy of a formal business letter to your client should be attached to the email. It should be on letterhead with your [hypothetical] contact information. a histogram of willingness-to-pay numbers should be contained in the letter. Start by drafting the letter in Word, and then save it as a pdf file (Google how to, it's easy).
- The letter should remind the reader what you were hired to do, how you conducted your data analysis, and your results. YOU ARE NOT WRITING THE EMAIL TO ME, but to CEO Larry Cowary, your client, who probably knows nothing about statistics, wants a clear and thorough answer, but doesn't wanted to be annoyed by irrelevant details. Remember, he might not even know you were hired to do the project, or may outsource so many projects he doesn't remember it.
- The letter shouldn't be long, but should be at least several paragraphs and should be written as perfectly as possible. One grammatical mistake or misspelled word and the client will doubt your competency.
- In the body of your email simply copy and paste the narrative from your letter. If you can paste the histogram into the email, great. Otherwise, alter the narrative slightly so that you refer to the attached histogram, instead of an embedded histogram.
- Be thoughtful. Would you ever submit your analysis to a client without thanking them for the opportunity and providing them with contact information should they have any questions? Of course not.
- This is not an assignment where you are just trying to get the right answer. I will grade you as if I am your boss and I am evaluating your work, determining whether you will embarrass me or make me proud if I give you responsibilities. If your email makes my firm look great, you get an A. If your email thoroughly embarrasses my firm, you get an F.
- One attachment containing an Excel spreadsheet with your histogram and work should be included.
- One attaOne attachment containing a pdf copy of the histogram should also be included.
- To give you an idea of what the narratives and letter should look like, consider this sample answer to a different Important Email assignment from a previous class.
- It is possible that the company may begin selling the steaks at the premium you suggest and find themselves losing money. To protect yourself, you should also describe the ways in which your data analysis is imperfect. Don't just say it is imperfect, describe exactly why your projections may be wrong. This is something you will have to think about. Also, there might be some additional considerations you might wish to include. That is, you are welcome to provide a specific recommended premium, but give them reasons why they may wish to want to increase it or decrease it depending on their long-term goals.
