Draft Commercials Part B

The model built in part A is simple with its strictly proportional relationships. It nevertheless generates important insights. But we realise that some of the relationships in the model are particularly suspect. We have also not used the data provided to us. In this assignment we shall try and modify our simple model to incorporate changes. But before you begin rename the sheet containing the simple model as Model_1. All the while we shall keep the following problem kernel in purview:
Commissioning multiple draft commercials may improve the quality of the final advertisement chosen. Under what circumstances will this improvement more than outweigh the added cost?

A. In the first of part of this assignment we shall change the relationship that related MaxNDR and number of drafts. There is little doubt that whatever number of drafts we decide to get developed we are going to choose the best ad from among the drafts. It however makes intuitive sense to imagine that as the number of drafts increase, the incremental benefit from getting additional draft ads is going to decrease (i.e. the graph of MaxNDR is going to show diminishing return with increasing number of drafts). To test this new relationship in our model, we need a function that relates the number of drafts N to MaxNDR. The power function given below is one such: MaxNDR = c*Nd c and d are constants in the equation. Note that w hen d = 1 the power function takes a proportional form. By changing the value of d we may choose either a curve with diminishing rate of growth or a curve with increasing rate of growth. Create a new sheet with appropriate parameters and formulae. Use the value of Gradient in the simple model as c, select an appropriate value for d and replace the simple proportional function for MaxNDR. Rename this sheet as Model_2. Insert a graph to show the sensitivity of Optimal Number of Drafts to the parameter d.

B. The inclusion of diminishing return in part A does improve the quality o f the model. It however does not account for the causes of diminishing return why is it that the best of N drafts increases at a decreasing rate? This makes intuitive sense but can we model this process in a more transparent manner? This we realise will improve our understanding of the process and thus improve our ability to decide better. So far use have not used the data on Retained Impression per Dollar (RI/$). These data come from a wide variety of products, so they would not be directly applicable to any single product the company might be advertising. However, the data suggest there is a high degree of variability in RI/$.

Moreover, the distribution is such that most ads have a modest RI/ $ but a few have values many times the mean. In other words, the distribution is highly skewed. Several factors could account for this pattern in the data. One factor is systematic differences among product types. It could be, for example, that cereal ads are generally more memorable than bath soap commercials. But this seems unlikely as a general rule, so we assume for modelling purposes that all ads are drawn from the same distribution. We may argue that if we think of ad quality as being random, then we see the process of buying multiple drafts as akin to drawing random samples from a probability distribution. Presumably, the samples are independent, and under our assumption, they all come from the same distribution. If, hypothetically, the distribution has a small variance, it would seem likely that a single draft ad would be the best choice. That is because each draft is unlikely to differ much in quality from any other draft. But if the distribution has a high variance, sampling more than one ad makes more sense, since we are more likely to draw an especially good outcome on repeated samples. And what if the distribution is skewed, as is suggested by the data does that change the results of this sampling process? To incorporate uncertainty in our model, we need to invent a distribution for NDR, since that is our measure of ad quality. If our intuition is correct, it is the variance of that distribution that is important in determining the optimal number of drafts. So we want to use a distribution such as the normal or lognormal that can incorporate both high and low variances. We begin by assuming the NDR for each draft ad is drawn randomly from a normal distribution with a mean of 0.50 and a standard deviation of 0.25. Use rand() in place of x. Modify Model_2 and create Model_3 on a separate sheet. Your model should simulate results for eight different choices we have for the number of drafts. Use NORMINV(probability,mean,sd) to generate samples from the NDR distribution, one for each draft. What value will you use in place of probability? The range with the formula to derive NDR values should appear like what is shown below. In J23:J30 are the eight samples drawn using NORMDIST. In range B23:I30, first row (23) has the first sample, second row (24) has the 2nd one and so on. I have used excel functions, if(), row() and Offset() to fetch the appropriate value from the range J23:J30. See if you can replicate this. In the model the MaxNDR for N drafts can now be the maximum (MAX) of N NDRs in the range B23:I30.

How do Total Retained Impression and optimal Number of Drafts change with increasing standard deviation of the normal distribution? Insert charts in Model_3 worksheet to justify your claim. C. We now wish to return to our assumption that the distribution of ad quality is given by a normal distribution. The data on RI/$ suggest that the distribution of ad quality may be highly skewed, with some very high quality ads but a predominance of low - to - moderate quality ones. The normal distribution, of course, does not allow for this shape, but the lognormal distribution does. Copy the sheet Model_3 and rename it Model_4. In the range of sample values (J23:J30) replace NORMINV with LOGINV with the same mean (0.50) and standard deviation (0.25). In this worksheet insert a chart to show variation of Retained Impression with Number of Drafts. Your chart should show two data series, one for Normal distribution and the second for Lognormal distribution. You should upload the workbook containing the model, Model_1,Model_2 and Model_3.