All right, so some questions for you to consider as you're working through this exercise. What kind of impact is including the deductible going to have on the warranty plan in terms of consumers' decisions? If I have zero deductible, chances are I'm going to have to charge a higher price so think about. Why is that the case? Because the retail as a retailer we want to make a profit off of this. So we need to charge enough to the consumers in order to make that profit. Well if there's a deductible, if each service incident the consumer has to pay something. It's not all on the retailer to send that product out for service. May also want to consider what's the impact of building a quota into the plan. That quota is going to hurt some consumers if they have a lot of incidence. If we are dealing with cell phones, for example, and you're very abusive to your phone and you don't take care of that cell phone. You might have to have it repaired very frequently. Other people maybe they try to be careful but stuff happened. It drops. The screen cracks. It might night be to be serviced once or twice compared to someone who's very abusive toward their device. Maybe they're dealing with five or six times. Well a quota's going to affect the people who have a lot of service incidences. Not probably not going to play a role for the people who don't have very many service incidents. And what we want to be able to look at is both how the deductible, how the quota, their impact, how's that affected based on the failure rate of the device? All right so, let's think through what this worksheet has to look like. We need, from a consumer stand point, the consumers total costs of service of going to be affected by what's it cost for the third party. So let's just assume a particular number to get devices serviced by the third party. That's what the consumer would have to pay in the absence of any service coverage for each incident, all right. So for a consumer, they've gotta think through what's the price per incident from a third party and how likely am I to have a given number of service failures. How much is it going to cost me to purchase these warranty plans. And that, the cost of that warranty plan it's going to be comprised of the upfront cost as well as if there is a deductible. All right, so those are factors that we're going to have to bring into at the consumer decision making. Consumers are only going to buy those plans if they expect to save money with those plans. Now, in terms of setting the price of the warranty coverage, setting the deductible level, setting the quota. Those are decisions that the business is making that are going to impact the consumers' decision. So, in order for the business to sell anything, they get the cost of service for their warrant plans have to be better for the consumer compared to getting it from a third party. All right. So if the cost of buying the plans must be total cost of the service ends up being more third than the third party we don't make any, we're not going to sell anything. All the consumers are going to op for going to that third party. All right, so we're going to look at what's the third party cost what's the cost of using the plans with us. And we as the retailer are going to be the one to be able to set what's the price of the plan first year, second year. What's the appropriate deductible? What's the quota going to be? We're not trying to say this is the optimal deductible to set or what's the optimal quota to set. We're just trying to build a decision support tool that's going to allow us to test out different deductible levels, to test out different levels of the quota. To test out different price points so for example do we want to set let's say that cost of repairs from a third party is $100. If we assume that we can do it at half that price it costs us $50. Well we're saving $50, essentially how much of that cost are we going to be able to pass on to the consumers. All right? So rather than giving you a template to guide you through this problem, the information as far as the constraints, there's an Excel file that's up on the course website that you can download. But it just contains that information and it's going to be up to you to structure the Excel Sheet in such a way that you're able to calculate the cost to the consumer based on the decisions made by the retailer and calculate the retailer's profit. The goal here is to build a sheet for the retailer to say, based on the assumptions we're making If we were to set based on what it costs us to get repairs done. The third party costs to get repairs done. The price that we charge for the warranty coverage, the deductible, the quota. Based on the pieces that we're able to control. Based on the pieces that we're not able to control. When we take into account the uncertainty in the number of incidents, what happens to our profitability when we change these different levels. So, that's what the objective of this exercise is. Let's see what happens to profitability as we manipulate the deductible level, as we manipulate the price of the policy, as we impose quotas of different levels. We just want to build the decisions support tool that's going to facilitate calculating what the profit is going to be under these different scenarios all right? And then if you want to stretch yourselves a bit we're building this initial sheet making the assumption that the consumer is perfectly rational. That as long as they save one cent by choosing the retailers extended service plan, they'll do that as opposed to opting for the third party plan. But, what if the consumer is not perfectly rationals, or perfectly rational. Why might they opt not to buy the plan up front? That is, why might they decide, you know what? I don't need this service plan, nothing ever goes wrong for me. So it's okay, I'm just going to roll the dice. If consumers aren't rational in that way, if they're risk seeking, how might we incorporate that into our decision making. How's that going to affect the price that we're able to charge the deductible and the quota? But also, think about it going the other way. That is, what if a consumer's risk reverse? I know that it's more expensive for me to buy the service plan from the retailer. I just want the peace of mind, so I don't have to have any concerns. So, how would we think about incorporating that into our decision support tool? The basic information is contained in the file thats up on the course website. There is not a template in this case, you've been provided with the information and it's up to you guys to take. This particular problem, and try to put some structure on it, just as we have with the other examples that we've looked at so far over the course. And then, in the next session what we're going to do is, I'll walk through how I would have set up this worksheet. And you can see the differences that we made, where did you potentially depart, and post comments to the website based on questions that you might have about some of the decisions that I made compared to some of the decisions that you made.
