Business Decisions using P-Distributions

Companies make decisions, both large and small, every day. There are many ways that
business decisions can be made. One type of decision-making analysis involves using
probability distribution and economic measures to make decisions.

After analysing the probabilities of gain and loss associated with each investment decision, a
business can apply probability models to calculate which investment or investment
combinations yield the greatest expected profit.

For example, a company might have a probability distribution for the change in sales given a
particular marketing campaign. The values on the "tails" or the left and right end of the
distribution are much less likely to occur than those in the middle of the curve. The below
Visualizations provide insights that can be observed using Probability distribution.

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Binomial Distributions

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 Example: Binomial Experiments
1. A certain Sale has an 85% chance of success. A
sales representative performs the sales on eight
prospective customers. The random variable
represents the number of successful sales.

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 Solution: Binomial Experiments
Binomial Experiment
• n = 8 (number of trials)
• p = 0.85 (probability of success)
• q = 1 – p = 1 – 0.85 = 0.15 (probability of failure)
• x = 0, 1, 2, 3, 4, 5, 6, 7, 8 (number of successful sales)
A Salesperson has a 50% chance of making on customer visit
and she arranges 6 visits/day. What are the probabilities of her
making 0 – 6 Sales?
Using BINOM.DIST(Event#, Trials, Probability_s, cumulative)

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 Negative Binomial Distribution

• Pat is required to sell candy bars to raise money for

the 6th grade field trip.
There are thirty houses in the neighborhood,
and Pat is not supposed to return home until five
candy bars have been sold.
So the child goes door to door, selling candy bars.
At each house, there is a 0.4 probability (40%) of
selling one candy bar
and a 0.6 probability (60%) of selling nothing.

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 Geometric Distribution
Definition: The geometric distribution represents the number of failures before
you get a success in a series of Bernoulli trials. This discrete probability
distribution is represented by the probability density function.

# 1: You know that the probability that you will make a sale on any given sale
trial is 0.23. Find the probability that your first sale on any given day will
occur on your fourth or fifth customer.

Solution:
• P(sale on fourth or fifth customer) = P(4) + P(5)
• Geometric with p = 0.23, q = 0.77, x = 4, 5
• P(4) = 0.23(0.77)4–1 ≈ 0.105003
• P(5) = 0.23(0.77)5–1 ≈ 0.080852
• P(sale on fourth or fifth call) = P(4) + P(5)
≈ 0.105003 + 0.080852
≈ 0.186

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 Solution: Geometric Distribution
#2 : what is the probability you meet an Customer on a third trying to buy an
Washing Machine, if the probability of success was 0.2 from earlier statistics.
• p = 0.2 as p and with X = 3

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 Example: Poisson Distribution
#1. The mean number of car sales per month at a automobile dealer shop is 3.
What is the probability that in any given month four car sales will occur at this
dealer?
Solution: Poisson with x = 4, μ = 3
34(2.71828)3
P (4)   0.168
4!
# 2. The daily sales volume of 60-inch 4K-UHD TVs at XYZ Electronics is
five. Calculate the probability of XYZ Electronics selling nine TVs today.
μ = 5, since five 60-inch TVs is the daily sales average
x = 9, because we want to solve for the probability of nine TVs being sold
e = 2.71828

Inserting values in the distribution formula:

P(x; μ) = (e-μ) (μx) / x! = (2.71828-5) (59) / 9!

= (0.0067) (1953125) / (3262880)
= 0.036
3.6% is the probability of nine 60-inch TVs being sold today.
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Exponential Distribution

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 Exponential Distribution (Continued)

• Example : A manager of a fast food restaurant observes that, an average of 9

customers is served by a waiter in a one-hour time period. Assuming that the
service time has an exponential distribution, what is the probability that
 A customer shall be free within 12 minutes.
 A customer shall be serviced in more than 25 minutes.
• Solution:
(a) Given, μ = 9 customers / hour (b) Given, μ = 9 customers / hour
• t = 15 minutes = 0.25 hour t = 25 minutes = 0.4166 hour
Therefore, p (less than 15 Therefore, P (more than 25 minutes)
minutes) = l – e– mt = l – e– mt
= 1– e– 9 × 0.25 = 1– e– 9 × 0.4166
= 0.8946 = 0.0235

Larson/Farber 4th ed 10
 Hypergeometric

• A Car dealer shop has has 101 female customers and 95 male . A random sample of 10
customers is drawn. What is the probability exactly 7 of the customers will be female?
• 101C7*95C3/(196C10)= (17199613200*138415)/18257282924056176 = 0.130
Where:
101C7 is the number of ways of choosing 7 females from 101 and
95C3 is the number of ways of choosing 3 male customer* from 95
196C10 is the total voters (196) of which we are choosing 10
• *That’s because if 7/10 customers are female, then 3/10 voters must be male.

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 Example:

The mean number of car sales per month at a

automobile dealer shop is 3. What is the probability
that in any given month four car sales will occur at this
dealer?

Solution:
• Poisson with x = 4, μ = 3
34(2.71828)3
P (4)   0.168
4!

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 Uniform Distribution

• Sales man put a demo pod on a street corner handing a product of worth $50 to a
lucky passerby. If it were completely random, then every person that walked by
would have an equal chance of getting the product worth of $50. This is an example
of a uniform probability distribution. It's uniform because everyone has an equal
chance (probability percent is equal to 1 divided by the number of people walking
by).

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 Normal Distribution

Shoe Size:
As per the data collected in the US, female shoe sales by size is normally distributed
because the physical makeup of most women is almost the same.

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 Where would you need to model a joint PDF or PMF

• We need to fill this

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• An example where you care about variance and not mean.
 Sales price variance:
• The number of units sold varies from the expected amount. For example, a company begins selling in a new region,
and expects to sell 100,000 in its first year, but only sells 80,000 units.
 Sales volume variance:
• The price point at which goods or services sell is different from the expected price point. For example, an increased
level of competition forces a company to reduce its prices.
• With the price and volume vairance, you could decide whether to do a volume based business(high competition)
with less profit per product or price based business with higher profit margin (monopoly markets).
• Management typically pays considerable attention to these components of the sales variance, in order to see if
prices, product features, or marketing must be adjusted to optimize total sales and profits. Here are several actions
that can be taken: Issue a limited-time coupon offer that is effectively a price cut; this approach will reduce short-
term profits on a per-unit basis, but should increase the number of units sold.
• An example where you observe Skew.
 In many sales outlets, 50% or more of the sales happens in the last few days of the month. Managers are clueless till the
last moment of the last day on whether they will meet their target. This will be left-skewed.
 When the customers get paid off their monthly salary, They are more willing to spend at the beginning of the month when
they have cash, and less towards the end of the month due to running out of cash or savings. This will be right skewed in
this example.

• An example where you want to distinguish between high and low kurtosis where the variance is the same.
 Suppose the management would like to measure the performance of the sales representatives of a company. Sales
representative is given a target of selling 10 (+ or - 2) products (variance is constant).
 Management would be happy if a distribution is of high kurtosis (if k<=3), meaning, most of the sales reps are
performing fine, which indicates, more slaes/revenue or the health of the business. If the K>=3, then there are only few
performing very good(par targets) and it might be a demotivating factor for the other sales reps, who are just meeting the
sales target.
 If the distribution follows, low kurtosis, then we have more sales reps not meeting but just nearing the sales target.

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• Where do you care about Inferential statistics more than descriptive?
 When we are looking at a statistic which represents the entire sales of last year and forecasting the same for the rest of the
years. For example, looking at the last year sales, we predict of generalize saying, every Diwali, Christmas seasons the
sales are high compared to other seasons in the year.
• An example where you need the following confidence intervals: – z,t, proportion z and Chi-Squared.
 Because, it is impossible to predict a future event with 100 percent accuracy,confidence intervals are used by businesses
to manage risk.

 Z-distribution:
• Suppose, the sales team is predicting the Sales for next year to be between $2 bn to 5 bn, although we know that he
is predicting it based on the sales data available for all the years till date, here we can get to know the standard
deviation of the population (assuming we get the sales data for n>30 years)

 t-distribution:
• The sales team is predicting the Sales for next year to be between $2 bn to 5 bn, although we only know the sales
data of last two years. Here the standard deviation of population is not know but only the sample data's standard
deviation. (n<30 the company is relatively new, not older than 30 years)
 Proportion z:
• If we consider, a sales executive trying to sell a product to 10 customers per day, assuming he might end-up selling
the product to 6 customers out of 10(binomial distribution). With this small sample size, we are able to get that p-
hat of successful sell as 0.60 which is not the true P-value of SUCCESS for every sales man. With this confidence
interval, we are going to map this p-value in-general to the population with a certain confidence interval(90 or 95%
etc) and drive an inference.

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