Assignment - Quantitative Methods

Student ID
Date
 Executive Summary
The research aims to address the pricing decision of a company involved in manufacturing and

assembling of laptops. The company wants to keep the price of its newly introduced variety of

laptops in accordance with customer perception and their experience. The research has been

carried out on a primary dataset of 200 sample customers. During our research, the customers

were asked different questions and based on these questions, different analysis were conducted to

identified relationship between different variables. On average, people from region B are willing

to pay more price for version 1 laptop, however, mean price for version 1 laptop should not be

more than $1,000.

 Table of Contents

Contents
1 Introduction..............................................................................................................................4
1.1 Business Problem..............................................................................................................4
1.2 Statistical Problem............................................................................................................4
2 Research Methodology.............................................................................................................4
3 Descriptive Statistics of Variables...........................................................................................5
3.1 Region...............................................................................................................................5
3.2 Price of verion 1 laptops...................................................................................................5
3.3 Price of version 2 laptops..................................................................................................6
3.4 Willingness to pay extra for version 1..............................................................................7
4 Statistical analysis – relationship between variables................................................................7
4.1 Relationship between “Region” and “How much would they pay for version 1”............7
4.2 Relationship between prices of version 1 and version 2...................................................8
4.3 Relationship between “which region” and “would you pay more for version 1”.............8
4.4 Confidence interval for “would you pay more for version 1”..........................................9
5 Hypothesis Testing...................................................................................................................9
5.1 People would pay more than $1000 for version 1 on average..........................................9
5.2 Relationship between “which region” and how much would they pay for version 1.......9
5.3 Relationship between “which region” and “would they pay more for version 1”..........10
6 Lurking variables....................................................................................................................11
7 Conclusion and Recommendation..........................................................................................11
8 References..............................................................................................................................12
1 Introduction
The report analyses a practical business problem for a company, XYZ Pty Ltd, manufacturing
laptops and computers. The company has introduced two different versions of laptop and it
would need to know the customers’ perception from different version about prices for these
laptops. Moreover, the company has invested more money and effort in manufacturing version 1
laptops, and it intends to sale them at a cost higher than version 2. For this purpose, the company
has asked the customers whether they are willing to pay extra amount for the version 1 laptops.
1.1 Business Problem
The research aims to address the pricing decision of a company involved in manufacturing and
assembling of laptops. The company wants to keep the price of its newly introduced variety of
laptops in accordance with customer perception and their experience. This approach is known as
value-based pricing where price of company’s products are based on how much the customers
value the product and how much they consider the worth of that product.
1.2 Statistical Problem
The underlying statistical problem for the purpose of this research include:
 What is the mean and standard deviation of version 1 laptops’ price that customers
perceive?
 What is the mean and standard deviation of version 2 laptops’ price that customers
perceive?
 Is there any significant difference between perceived price of version 1 and version 2
laptops?
 Do the behavior of region A and region B customers differ in terms of setting prices for
laptops?
 The company intends to charge more than $1,000 for version 1 and $1,000 for version 2.
Can it do so, based on the perceived price by customers?
 Is it possible for the company to charge $100 extra for version 1 laptops?
 Is there any relationship between region and price of version 1 laptops?

2 Research Methodology
The research has been carried out on a primary dataset of 200 sample customers. During our
research, the customers were asked the following questions:
 Which region are you from? Region A or B?
 How much would you pay for version 1 laptops?
 How much would you pay for version 2 laptops?
 Are you willing to pay some extra price for version 1 laptops?
Based on these questionnaires, we found two categorical variables; region and willingness to pay
extra price for version 1, and two numerical variables i.e. perceived price of version 1 and
perceived price of version
Detailed statistical analysis and hypothesis testing was conducted using descriptive statistics,
histograms and hypothesis testing tools available in data analysis Pack of Microsoft Excel.

3 Descriptive Statistics of Variables

Descriptive statistics of both categorical and numerical variables are as follows:
3.1 Region
Out of 200 sample, 109 people belonged to region A and 91 people belonged to region B. Region
A represents people from Sydney while region B represents people from outside Sydney. Hence,
respondents from Sydney are more than the respondent from outside Sydney.
Regio Count
n
A 109
B 91
Total 200

Count

A
B
46%
55%

3.2 Price of verion 1 laptops

how much would they pay for version
1?

Mean 1030.64
Standard Error 9.025453
Median 1031.5
Mode 1129
Standard Deviation 127.6392
Sample Variance 16291.76
Kurtosis -0.87732
 Skewness 0.016994
Range 515
Minimum 804
Maximum 1319
Sum 206128
Count 200
Confidence Level(95.0%) 17.7978

The above table shows that people on average would want the price of version 1 laptops to be
$1,030.64; however, the standard deviation $127.84 that can go from left or right of the mean.
Positive skewness reflects long right tail of data and accumulation of values towards left. Though
it is quite small which mean data tends to be normal around mean. We can see this through
histogram.

Histogram - price of verison 1

35

30

25

20
Frequency

15 Frequency

10

0
0 0 0 0 0 0 0 0 0 0 0 re
85 90 95 100 105 110 115 120 125 130 135 Mo

Bin

3.3 Price of version 2 laptops

how much would they pay for version

2?

Mean 991.64
Standard Error 8.085486
Median 986.5
Mode 833
Standard Deviation 114.346
Sample Variance 13075.02
Kurtosis -1.21035
 Skewness 0.052128
Range 395
Minimum 805
Maximum 1200
Sum 198328
Count 200
Confidence Level(95.0%) 15.94423

As compared to version 1 laptops, mean price of version 2 is a little lower i.e. $991 and standard
deviation is $114 which makes co-efficient of variation to be 0.115 which is a little higher. The
data is positively skewed and have negative Kurtosis which means that the distribution has
lighter tails as compared to normal distribution. Histogram of data distribution is as under:

Histogram - price of version 2

35
3.4 Willingness to
30 pay extra for
25 version 1
When asked the
Frequency

20
Frequency
customers, whether they
15 are willing to pay some
extra price for version 1
10
laptops, their response
5 was as follows:
0
Extra price for version count
850 900 950 1000 1050 1100 1150 1200 1250 More
1 %age
y 119 59.5%
Bins
n 81 40.5%
Total 200
Out of 200 people, 119 people i.e. 59.5% are willing to pay extra price for version 1 laptops.

4 Statistical analysis – relationship between variables

After descriptive statistics, we carried out statistical analysis to find relationship between
different variables. For this purpose, we used cross tabulation and pivot tables in excel.
4.1 Relationship between “Region” and “How much would they pay for version 1”

Row Labels Average of how Max of how

much would they much would
pay for version 1? they pay for
version 1?
 A 1,003.54 1,198.00
B 1,063.10 1,319.00
Grand 1,030.64 1,319.00
Total

The above table shows that people from region be are willing to pay a little more for version 1 as
compared to people from region A. The maximum price region B is willing to pay is $1,319
while region A people are willing to pay a maximum of $1,198 for version 1.
4.2 Relationship between prices of version 1 and version 2
To find out the relationship between prices of version 1 and version 2, we plotted a scatter graph
and found a regression line through it:

how much would they pay for version 2?

how much would they pay for version 2?
Linear (how much would they pay for version 2?)
1,300
1,200
version 2 price

1,100
1,000
f(x) = − 0.01 x + 994.68
900 R² = 0
800
700
$700 $800 $900 $1,000 $1,100 $1,200 $1,300 $1,400
vesion 1 price

As can be seen from the value R2 – coefficient of determination, there is a week relationship
between prices of version 1 and version 2 laptops. Scatter plot also shows random behaviour and
there is not any significant pattern between data values.
4.3 Relationship between “which region” and “would you pay more for version 1”
Cross tabulation between these two variables provided the following results:
Count of Count of
Region Yes No Total
A 58 51 109
B 61 30 91
Grand Total 119 81 200
More people from region B think that they can pay higher price for version 1 as compared to
people from region A.
4.4 Confidence interval for “would you pay more for version 1”
Since the variable “would you pay more for version 1” is a categorical variable, hence its
confidence interval can be found using proportion of means. The formula for which
is[ CITATION Sin14 \l 1033 ]:

Ps (1− ps )
√
ps ± Zα /2 (
n
)

The formula used in excel for finding margin of error is:

NORMINV(α/2, 0, sqrt(Ps * (1-Ps)/n)
The results range from +0.06803 to -0.06803. Hence out of 59.5% people who said that they
shall pay more for version 1, the confidence interval is 52.70% - 66.30%. It means that the
company can be 95% confidence that at least 52.7% people shall be willing to pay more for
version 1 and the maximum proportion of such people would go up to 66.3%.

5 Hypothesis Testing
We then carried out hypothesis testing on different variables and the results are mentioned
below:
5.1 People would pay more than $1000 for version 1 on average
Null Hypothesis: H0: u > 1,000
Alternative Hypothesis: H1: u=<1,000
Level of significance: we selected 95% confidence interval to test our hypothesis that people
would pay more than $1,000 for version 1 on average.
Test Statistics: Test statistics used for this purpose is:

Results: The probability value of z-test using z.test function in excel is 0.00034 which is less
than 0.05 and lies at the critical region. This means that we shall not accept our null hypothesis
that people shall pay more than $1,000 for version 1 laptops.
5.2 Relationship between “which region” and how much would they pay for version 1
The relationship between these two variables has already been discussed in earlier part, where
we established that people form region B are willing to pay higher prices for version 1. To test
this hypothesis, we conducted ANOVA test.
Anova: Single
Factor
 SUMMARY
Groups Count Sum Average Variance
A 109 109386 1003.541 13578.9
B 91 96742 1063.099 17773.56

ANOVA
Source of Variation SS df MS F P-value F crit
Between Groups 175918.9 1 175918.9 11.36019 0.000902 3.888853
Within Groups 3066141 198 15485.56

Total 3242060 199        

The ANOVA results show a p-value of 0.000902 against our null hypothesis that rho = 0 i.e.
there is no relationship between the variables “region” and “how much would they pay for
version 1”. We, therefore, reject our null hypothesis because p-value is below 5% and tend to
establish that the two variables have a significant relationship between them.
5.3 Relationship between “which region” and “would they pay more for version 1”.
Both the above variables are categorical in nature and to test their association, we shall use Chi-
Square test[ CITATION Tod11 \l 1033 ].
Observed value
Region Count of Yes Count of Total
No
A 58 51 109
B 61 30 91
Grand 119 81 200
Total

Expected values
Region Count of Yes Count of Total
No
A 64.855 44.145 109
B 54.145 36.855 91
Grand 119 81 200
Total

Chi-Square Statistics: (Observed – Expected) ^2/ Expected

 Region Count of Yes Count of No Total
A 0.724555 1.06447 1.789025
B 0.867874 1.275024 2.142898
Grand 1.592429 2.339494 3.931923
Total

The calculated value of Chi-square is 3.93 which is greater than the degree of freedom (r-1)(c-1)
= 1, therefore we reject our null hypothesis that there is no association and can establish that
there is certain degree of association between the variables.

6 Lurking variables
A lurking variable is a type of variable that is not included in the exploratory data analysis at the
time of research study, however, this variable can impact the results of the study in a significant
manner. If there is any lurking variable in the research, it can falsify the results by declaring
strong relationship between different variables, when there is no or insignificant relationship
between them[CITATION Liz11 \l 1033 ]. For instance, if we study the impact of diet and
exercise on blood pressure problem of the patients, then the result cannot be accurate, if we take
into account all the variables that can impact a person’s blood pressure. In this scenario, lurking
variables can be whether the person smokes, or undergoes higher stress levels.
In order to understand the presence of lurking variables in dataset, research needs to review the
data in detail and from logical or practical perspective. They should reconsider all the variables
used in data analysis and identify whether any important variable is not left out. Moreover, they
can also plot the data on graphs. If there is any non-linear trend among variables, then there
could be a possibility of presence of lurking variable[ CITATION Arm18 \l 1033 ].
Under our current study, lurking variables can be customer’s monthly income. People having
higher income can afford to pay higher prices for laptops while people earning less income are
not able to afford expensive laptops. There could be a reason that people from region B are
earning higher monthly income as compared to people from region A, that is why their mean
price for laptops was higher than region A people.

7 Conclusion and Recommendation

The study is limited due to the number of variables used for analysis. Only two categorical
variables and two numerical variables are insufficient to make such an important decision of
setting price. A number of other variables can be used to make the study more effective for
management’s decision making[ CITATION lar12 \l 1033 ]. These variables are:
Age: Age of customers can be asked to identify different age groups for price preferences. A
clear relationship can be determined between people from a certain age group and the price they
are willing to pay for new products. Moreover, they can also identify if the customers belonging
to a different age group can prefer a particular laptop based on its features. Generally, young
people are more tech savvy than older people, so by using Age as a variable we can determine
their price range that young and old people can afford.
Gender: Analyzing data on the basis of gender would also be an interesting study and can reveal
whether there is any significant difference between the perceived prices of new products between
male and female customers.
Preferred features: A categorical list of preferred features can identify the elements for which
customers are willing to pay higher price and which of the elements they don’t pay attention to.

8 References
1. Arman Sabbaghi, Q. H., 2018. Model transfer across additive manufacturing processes
via mean effect equivalence of lurking variables. The Annals of Applied Statistics, 12(4),
pp. 2409-2429.
2. lardbucket, 2012. Factors That Affect Pricing Decisions. [Online]
Available at: https://2012books.lardbucket.org/books/marketing-principles-v1.0/s18-02-
factors-that-affect-pricing-de.html
[Accessed 2019].
3. LizethGarcía, B. V.-S., 2011. Spurious regression and lurking variables. Statistics &
Probability Letters, 81(12), pp. 2004-2010.
4. Singh, A. S., 2014. SAMPLING TECHNIQUES &DETERMINATION OF SAMPLE
SIZE IN APPLIED STATISTICS RESEARCH: AN OVERVIEW. International Journal
of Economics, Commerce and Management, 2(11).
5. Todd Michael Franke, T. H. C. A. C., 2011. The Chi-Square Test: Often Used and More
Often Misinterpreted. American Journal of Evaluation.