team alpha ibm presentation final
TRANSCRIPT
• Definition of Business Problem + Hypothesis
• Analytical Solution Approach
Retail Business Problem
• Product Association Analysis
• Revenue Management
Analytics in Action
• Business Case
• Next Steps
Key Takeaways
Option 1 Option 2
Current Purchase Vegetables Vegetables & Butter
Suggested Bundle Vegetables + Butter Butter + Whole Milk
Implications If customer purchases bundle,
75% chance customer will
purchase Whole Milk
75% chance customer will
purchase bundle
Vegetables
Butter
Segment
A
•Price
Sensitivity
•Probability
of buying
Demand
and
Revenue
Model A
Optimal
Discount
for
Customer A
A
Segment
B
•Price
Sensitivity
•Probability
of buying
Demand
and
Revenue
Model B
Optimal
Discount
for
Customer B
B
Revenue Increase Over No Discount: 16%
Revenue Increase Over non-Targeted Discount: 7%
Total Revenue: $252,040
0%, $136,594 4%, $150,040
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
0% 2% 4% 6% 8% 10% 12% 14% 16%
Reven
ue
Discount
Revenue Model for Segment A
0%, $79,540
10%, $102,000
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
0% 2% 4% 6% 8% 10% 12% 14% 16%
Reven
ue
Discount
Revenue Model for Segment B
Assumptions: Metrics
Calculations: Impact:
$37.1M Incremental Revenue in Y1
NPV =$169M over 5 years
Payback Period <1 year
Cost 1: the team – 3 Data
Scientists
Assumptions:
• Model development and maintenance: requires a team of 3 Data Scientists at a rate of $100,000/year/statistician
• Model can be developed in 6 months
• Costs of adjusting existing Loyalty Platform to incorporate targeted bundling: $100,000
Cost 2: adjustment to
existing platform
Activity Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Ongoing
Hire team
Build and Refine analytical Model(s)
Adjust existing loyalty app
Maintain model and app
Loyalty Shoppers Customers Data:
Revenue $17,044,400,000
Average Basket size $85
Number of trips per year 78
Number of Loyalty Customers 2,570,799
Expected Incremental Basket Size $8.50
52 weeks ending 2015-01-
03
Revenue $42,611,000,000
COGS $32,063,000,000
Gross Profit $10,548,000,000
Selling & General Admin Expenses $9,886,000,000
R&D $0
Depcreciation / Amortization $0
Interest Expenses $0
Unusual Expenses (Income) $18,000,000
Total Operating Expense $41,967,000,000
Operating Income $644,000,000
Income Before Tax $78,000,000
Net Income $53,000,000
Net Income Margin 0.12%
Loyalty Shoppers Customers Data:
Year 1 (20% of
Loyalty Customers)
Year 1 (22% of
Loyalty Customers)
Year 1 (24% of
Loyalty Customers)
Year 1 (25% of
Loyalty Customers)
Year 1 (25% of
Loyalty Customers)
Revenue $17,044,400,000 $37,148,051 $40,862,856 $44,577,662 $46,435,064 $46,435,064
Average Basket size $85
Number of trips per
year 78
Number of Loyalty
Customers 2,570,799 514,160 565,576 616,992 642,700 642,700
Expected Incremental
Basket Size $8.50 4,370,358.97 4,807,395 5,244,431 5,462,949 5,462,949
All values are in CAD $ Start Up Costs Year 1 Year 2 Year 3 Year 4 Year 5 5 Yr Total Assumptions
Revenue
Increased Loyalty Shopper
Spend/Trip
$37,148,051 $40,862,856 $44,577,662 $46,435,064 $46,435,064 $215,458,697
20% of Loyalty Shoppers will increase their Avg.
Basket size by 10%. This will grow to 22%, 24%,
25% and 25% of Loyalty Shoppers over the
remaining 4 years after implementation. Revenues
expressed here are completely incremental to
existing Revenue base.
Sub-Total 0 $37,148,051 $40,862,856 $44,577,662 $46,435,064 $46,435,064 $215,458,697
Cost
On-going model maintenance
and updates
$300,000 $309,000 $318,270 $327,818 $337,653 $1,592,741
3 Data Scientists at an assumed rate of $100,000
per year (each) with assumed merit increases of
3% per year
Start-Up Costs-$250,000
3 Data Scientists at an assumed rate of $100,000
per year (each) for 6 months + updates to PC Plus
App
Sub-Total -$250,000 $300,000 $309,000 $318,270 $327,818 $337,653 $1,592,741
Profit -$250,000 $36,848,051 $40,553,856 $44,259,392 $46,107,246 $46,097,411 $213,865,957
Cumulative Cash Flow -$250,000 $36,598,051 $77,151,908 $121,411,299 $167,518,545 $213,615,957
Discount Rate 8.0%
NPV $169,034,819
IRR 14749.3%
Pay Back Period (Yrs) <1 year
Start-up Cost Itemization
Statistician/Modeler 1 $50,000
Statistician/Modeler 2 $50,000
Statistician/Modeler 3 $50,000
Updates to PC Plus App $100,000