Imperfect Prediction - Case 2
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Imperfect Prediction - Case 2

Example of unique binary decision

In this case the company is able to reach only 75% of the potential market. All other conditions remain the same as in Case 1.

Data Analytics Creates Value

This is a very common case that brings dissent between data analysts, operations, and finance departments. Data analysts and operations will point to the fact that the project increases revenue by 50% (from $5M to $7.5M). The finance department will be concerned that the price paid for this increase is $3M ($2M implementation and $1M maintenance) higher than the supplemental revenue which theoretically represents a bad investment.

Implementation costs can be partially recovered through depreciation thus making the project potentially profitable. The key factor here is to have maintenance costs substantially lower than the extra revenue.

The prevailing long term view is that implementation costs are one time payments and extra revenue is forever. In reality the competition will soon follow and take away some of the market share. The competitive advantage brought by the analytic project may have a surprisingly short life.

Although at first glance this appears to be a bad investment this case is probably better decided by strategists. In the future this project may be expanded and lessons learned may prove invaluable. The algorithms and code already developed may form the foundation of future projects that otherwise would have been too expensive or risky to develop.