Page 1 of 3 FIT5094 IT for Management Decision Making Semester 1, 2017 Assignment 2 Scenario – Personal Computing eStore According to market research company International Data Corporation (IDC), thinner, lighter, and more versatile mobile devices are expected to grow despite the growth of personal computing devices has been stabilised since 2012. A group of Melbourne‐based tech‐savvy investors saw this as a good business opportunity and came up with a proposal of establishing Personal Computing eStore (PCeS) in Australia. PCeS is a start‐up online retailer that is envisioned to offer a selective range of high‐end personal computing products including laptops, tablets, smartphones, and digital watches. They believe the best time of great opening should take place in winter season (May to August), when many Australians buy personal computing devices before the end of financial year to take advantage of tax return payments. You have been employed as a DSS analyst by the PCeS CEO to help him plan the establishment of the new e‐business company. While the PCeS executives have made what they think are sound judgments of the various factors surrounding PCeS, they want a DSS that will allow them to easily vary these estimates in order to see the impact of different assumptions on the company’s operation. A meeting has been held with the executives of the PCeS Strategy Committee where they outlined the nature of the company’s operation to you. The area that the committee wants help with is forecasting the ebusiness customer and profit scenarios for the first winter season. To simplify the scenario, the committee is planning at a weekly level, rather than daily or per order. There are four types of customers for PCeS:  Visitors – the set of people that have been attracted to PCeS website;  Browsers – people who have clicked at least one link (e.g. product details, customer reviews, terms and conditions) from the PCeS website;  Potential Customers – people who have added at least one item to the shopping cart; and  Customers – people who have completed the check‐out process (i.e. placed the order and made the payment in full). Attracting potential customers is a major task for a new e‐business company. The PCeS Strategy Committee is planning to spend $3,000 per week on traditional marketing channels (e.g. print, broadcast) to attract potential customers during the first winter season. Based on market research from similar small e‐businesses, it is estimated that the marketing impact factor is 0.002. This means that marketing spending multiplied by the impact factor estimates the number of new visitors per week. Besides traditional marketing channels, PCeS will also use popular social media channels, such as YouTube, Facebook, Twitter, and Instagram, to attract potential online shoppers. For an e‐business company, the cost of social media marketing is so minimal that can be ignored. According to Australian Bureau of Statistics, the online population is estimated to be 24,309,330 for the current year. The Strategy Committee estimated that two in every 2,500 online population will be offered with a link to the PCeS website via the social media channels, and only 7% of them will eventually click the link and FIT5094 IT for MGT DM Semester 1, 2017 Assignment 2 Scenario Page 2 of 3 be transferred to the PCeS website. However, the same market research shows that the number of new visitors attracted to the website is also subject to a seasonal factor. Consumers are more likely to shop for personal computing products closer to the end of financial year due to taxation incentives. This effect only impacts on the new visitors. According to a group of reputable industry experts, the seasonal effect on the effectiveness of the marketing spending is shown in Table 1. Table 1. Seasonal Effect on the Effectiveness of the Marketing Spending Month Sales Effectiveness of the Marketing Spending May High 125% June Very High 200% July Low 85% August Very Low 70% Not all visitors will stay and interact with the PCeS website. In fact, as a newly established online retailer, PCeS considers a lower than industry average interest levels of its visitors. It is estimated that seventy‐nine of every hundred visitors will leave the PCeS website. Those who stay and click the links on the PCeS website become browsers, who may evaluate their interested personal computing products. However, browsers may lose their interest anytime during the browsing process, and leave the PCeS website. The loss of interest may be triggered by insufficient product description or negative customer review, or simply because they cannot find their interested product. Market research from similar small e‐businesses shows about 90% browsers will not proceed with any transactions. Once the browsers add at least one item into the shopping cart, they become PCeS potential customers. However, not all potential customers will purchase the products in their shopping carts. Approximately 37% of the potential customers will delete products from their shopping carts or simply leave products in there without proceeding to check‐out. Finally, people who place the order and complete the transaction by making the payment via PCeS website become customers. All these attrition rates are also subject to a competition factor. PCeS competitors may run sales and marketing campaigns that cause PCeS visitors, browsers, and potential customers to leave the PCeS website. Depending on the time of the year, PCeS may get fluctuated competitions. The same group of industry experts also made predictions to the competition impacts on the attrition rates, as shown in Table 2. Table 2. Competition Factors Month Competition Effects on Attrition Rates May 85% June 100% July 90% August 85% The Strategy Committee estimated that existing customers will return to PCeS and make repeat purchases on average once every quarter (i.e. 13 weeks). And there are two common types of customers at PCeS: the registered customers who have completed the registration online, and the guest customers who checked out without any registration. The ratio of registered customers to guest customers is three to one for PCeS. To encourage more guest customers to register after their purchases, follow‐up emails will be sent out to them. It is estimated that one in every hundred guest customers will register each week after receiving the follow‐up emails. Market research also shows that registered customers are more likely to recommend the website to their friends and families – the ‘word of mouth’ factor, which is 0.005 for PCeS. FIT5094 IT for MGT DM Semester 1, 2017 Assignment 2 Scenario Page 3 of 3 As any other businesses, PCeS requires its revenues to be higher than its costs to be profitable. The operation of PCeS consists of fixed costs and variable costs. The Strategy Committee decided that PCeS will lease an office and a warehouse and acquire necessary equipment. Under the lease, taking into account necessary full‐time permanent staffing, utility charges and other costs, it is set to be $8,000 per week to cover such fixed costs. The capacity of the current full‐time permanent staff can service up to 40 customers per week. PCeS will hire casual staff to do deliveries, answer emails and phone calls when the number of customers per week exceeds 40. This is considered optional variable cost, which is estimated to be $40 per exceeding customer. The Strategy Committee also estimated that after taking out the cost of the product, PCeS will make $187 profit on average from every single purchaser each week. The CEO would like to understand the forecasted financial position of PCeS in terms of costs and revenues per week. A key variable that the CEO wants to be reported in the model is the PCeS conversion rate – one of the critical KPIs for any e‐businesses. Conversion rate is the proportion of visitors to a website who eventually become customers. The average conversion rate of online retailers is 1.33%. If PCeS’ conversion rate is below industry average, immediate action is required from the management team. On the other hand, if PCeS’ conversion rate is above 3% (i.e. the industry leader’s conversion rate), then PCeS is doing extremely well in converting site visitors into paying customers. Comparing the PCeS’ conversion rate per week to the industry average and the industry leader’s rate will show the CEO how the company’s overall operation is progressing. Dr Caddie Gao 11 April 2017