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Sun TV sells TV sets. It does not sell smart TVs so customers do not come to Sun TV if they want to purchase smart TVs. Sun TV wants to start selling smart TVs and will only sell smart TVs to customers to whom they advertise. Managers use customer information (income level, previous purchase history) to decide which customers they should target. The team needs to decide how sure it must be in predicting customer interest in a smart TV. If it is too cautious, it will choose a very high cutoff probability and only market to customers who it believes are very likely to be in the market for a smart TV. This may cause them to miss out on many customers. If they are too aggressive and choose a low cutoff probability, they may identify more individuals interested in buying smart TVs but also end up wasting marketing dollars on customers who are not interested in purchasing smart TVs. To choose a cutoff probability, the team develops the confusion matrices below for two cutoff probabilities on a validation sample of 1,000 households comprising 100 buyers and 900 non-buyers of smart TVs.

Sun TV sells TV sets. It does not sell smart TVs so customers do not come to Sun TV if they want to purchase smart TVs. Sun TV wants to start selling smart TVs and will only sell smart TVs to customers to whom they advertise. Managers use customer information (income level, previous purchase history) to decide which customers they should target. The team needs to decide how sure it must be in predicting customer interest in a smart TV. If it is too cautious, it will choose a very high cutoff probability and only market to customers who it believes are very likely to be in the market for a smart TV. This may cause them to miss out on many customers. If they are too aggressive and choose a low cutoff probability, they may identify more individuals interested in buying smart TVs but also end up wasting marketing dollars on customers who are not interested in purchasing smart TVs. To choose a cutoff probability, the team develops the confusion matrices below for two cutoff probabilities on a validation sample of 1,000 households comprising 100 buyers and 900 non-buyers of smart TVs.

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Sun TV sells TV sets. It does not sell smart TVs so customers do not come to Sun TV if they want to purchase smart TVs. Sun TV wants to start selling smart TVs and will only sell smart TVs to customers to whom they advertise. Managers use customer information (income level, previous purchase history) to decide which customers they should target. The team needs to decide how sure it must be in predicting customer interest in a smart TV. If it is too cautious, it will choose a very high cutoff probability and only market to customers who it believes are very likely to be in the market for a smart TV. This may cause them to miss out on many customers. If they are too aggressive and choose a low cutoff probability, they may identify more individuals interested in buying smart TVs but also end up wasting marketing dollars on customers who are not interested in purchasing smart TVs. To choose a cutoff probability, the team develops the confusion matrices below for two cutoff probabilities on a validation sample of 1,000 households comprising 100 buyers and 900 non-buyers of smart TVs. Required: 1. Complete the confusion matrices for the validation set. Actual Buyers Outcomes Non-Buyers Total Actual Buyers Outcomes Non-Buyers Total Confusion Matrix (0.70) Predicted Outcomes Buyers 20 120 Confusion Matrix (0.30) Non-Buyers Predicted Outcomes Buyers 90 750 Non-Buyers Total 100 900 1,000 Total 100 900 1,000
Transcribed Image Text:Sun TV sells TV sets. It does not sell smart TVs so customers do not come to Sun TV if they want to purchase smart TVs. Sun TV wants to start selling smart TVs and will only sell smart TVs to customers to whom they advertise. Managers use customer information (income level, previous purchase history) to decide which customers they should target. The team needs to decide how sure it must be in predicting customer interest in a smart TV. If it is too cautious, it will choose a very high cutoff probability and only market to customers who it believes are very likely to be in the market for a smart TV. This may cause them to miss out on many customers. If they are too aggressive and choose a low cutoff probability, they may identify more individuals interested in buying smart TVs but also end up wasting marketing dollars on customers who are not interested in purchasing smart TVs. To choose a cutoff probability, the team develops the confusion matrices below for two cutoff probabilities on a validation sample of 1,000 households comprising 100 buyers and 900 non-buyers of smart TVs. Required: 1. Complete the confusion matrices for the validation set. Actual Buyers Outcomes Non-Buyers Total Actual Buyers Outcomes Non-Buyers Total Confusion Matrix (0.70) Predicted Outcomes Buyers 20 120 Confusion Matrix (0.30) Non-Buyers Predicted Outcomes Buyers 90 750 Non-Buyers Total 100 900 1,000 Total 100 900 1,000
2. A team of management accountants at Sun TV estimates the payoffs from their actions. For every customer it targets, Sun TV will spend $20 to market to that customer. For every smart TV it sells, Sun TV makes a profit of $200 after taking into account the $20 it spends on that customer. Construct the payoff matrix and determine which cut off value Sun TV should use. Payoff Matrix Predicted Outcomes Buyers Actual Buyers Outcomes Non-Buyers Calculate the payoff at each cutoff probability: Non-Buyers Total payoff at cutoff 0.70 = Total payoff at cutoff 0.30 = TV should use the cutoff value at 1 because it results in the 2 1. is 2. is predicted payoff. 3. Are there any other factors Sun TV should consider before building such a model? A. Sun TV should consider the potential side effects of marketing too aggressively. If the company's marketing efforts irritate or offend interested customers, they may turn those customers away and lose sales. B. Sun TV should consider whether or not they could make their ROC curve less predictive. C. Sun TV should consider whether they could increase the Gini impurity of the data set used to make the prediction models. D. No other factors need to be considered beyond those already analyzed when producing the prediction models discussed above. Answer:
Transcribed Image Text:2. A team of management accountants at Sun TV estimates the payoffs from their actions. For every customer it targets, Sun TV will spend $20 to market to that customer. For every smart TV it sells, Sun TV makes a profit of $200 after taking into account the $20 it spends on that customer. Construct the payoff matrix and determine which cut off value Sun TV should use. Payoff Matrix Predicted Outcomes Buyers Actual Buyers Outcomes Non-Buyers Calculate the payoff at each cutoff probability: Non-Buyers Total payoff at cutoff 0.70 = Total payoff at cutoff 0.30 = TV should use the cutoff value at 1 because it results in the 2 1. is 2. is predicted payoff. 3. Are there any other factors Sun TV should consider before building such a model? A. Sun TV should consider the potential side effects of marketing too aggressively. If the company's marketing efforts irritate or offend interested customers, they may turn those customers away and lose sales. B. Sun TV should consider whether or not they could make their ROC curve less predictive. C. Sun TV should consider whether they could increase the Gini impurity of the data set used to make the prediction models. D. No other factors need to be considered beyond those already analyzed when producing the prediction models discussed above. Answer:
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