Fact Finders Limited, a marketing research company, has been asked by the marketing director of a large food-processing company to submit a proposal for a small market research project aimed at determining consumers’ probable responses to several planned changes in marketing strategy. The proposal should outline the procedures planned and quote a price. The marketing director is not binding himself to accepting the proposal, since he is still formulating his plan of action. It would cost Fact Finders about $200 to prepare the proposal.

Fact Finders’ president, Ms. Denise Jutasi, designs each project to fit individual require¬ ments. Furthermore, the nature of the research industry is such that in general the client de¬ pends on only one or two research firms, since a certain familiarity with the client’s problems is needed in the designing of the project. In addition, although price is important to the client, it is the research house’s reputation for doing high-quality work that will largely influence the cli¬ ent’s choice of research supplier. This particular client has used Fact Finders’ services several times in the past, although it has also adopted other proposals in some cases in preference to the proposals suggested by Fact Finders.

Ms. Jutasi has designed a project which she believes best fulfills the client’s needs, and she estimates that the incremental cost of the project could vary between $1,500 and $2,500. The wide variation in cost estimation is due to the many situational difficulties that are part of market research, including snowstorms, respondents not being home, difficulty in obtaining field staff, and unforeseen complications in other projects already in progress which could af¬ fect the one in question (for example, cause delays in starting).

The marketing director of the food-processing firm has indicated that he has allocated a budget in the vicinity of $2,500 for this project. At the top of this range, however, and dependent on the type of information the research firm will be able to obtain for him (outlined in the proposal), he may consider other methods of obtaining needed information or go with what information he has.

As a rule of thumb in calculating prices, Fact Finders uses cost plus 10 percent as a regular policy. Following are its best estimates of the probabilities with respect to the cost of the project and its chance of obtaining an acceptance by the client:

(a) Find the expected value of the proposal to Fact Finders at each of the three prices stated.

(b) Interpolate between the three prices shown to estimate the probability of acceptance when price is varied by $50 increments above $1,650. Would one of these price quotes be prefera¬ ble to the initial three prices?

(c) How would you recommend that Ms. Jutasi deal with the risk that costs might exceed the asking price?

Transcribed Image Text:

Incremental Cost of Project Probability Price (cost +10%) Probability of Acceptance $1,500 0.2 $1,650 0.99 2,000 0.5 2,200 0.70 2,500 0.3 2,750 0.10