Regression Analysis for Customer Satisfaction and Revenue

This document outlines a step-by-step approach to conducting a regression analysis to

understand how investments in labor, aimed at improving customer satisfaction, impact
revenue. Given a scenario with a limited budget, the goal is to maximize the return on
investment (ROI) by optimizing labor costs to enhance customer satisfaction.

1. Understanding Your Variables

In our analysis, the dependent variable (Y) is the future revenue of the store, which we aim
to predict or influence. The independent variables (Xs) include customer satisfaction,
broken down into percentages of highly satisfied, satisfied, and unsatisfied customers, and
the cost of labor, representing the investment in labor to improve customer satisfaction.

Additionally, we consider the budget constraint, which limits the amount that can be
invested in labor.

2. Steps for Regression Analysis

2.1 Data Collection

The first step involves gathering hypothetical data for past revenue over four years,
alongside the corresponding levels of customer satisfaction and labor costs. This historical
data is crucial for modeling the relationship between our variables.

2.2 Choosing the Right Model

Given multiple independent variables (customer satisfaction and labor costs) affecting our
dependent variable (revenue), a multiple regression model is selected for the analysis. This
model can accommodate the complexities of our scenario.

2.3 Encoding Categorical Data

Customer satisfaction, being a categorical variable, needs to be converted into a numerical
format. For simplicity, we'll use the given percentages directly as a weighted average
satisfaction score, avoiding the need for one-hot encoding in this instance.

2.4 Model Fitting

Utilizing statistical software or programming languages, we input our collected data to fit
the regression model. This step estimates how labor investment for improving customer
satisfaction impacts revenue.

2.5 Interpretation
Post-model fitting, the coefficients are interpreted to understand the effect of increasing
customer satisfaction through labor investment on revenue. This insight aids in budget
allocation decisions.
2.6 Optimization
With the budget constraint in mind, we use the model's findings to determine the optimal
labor investment that maximizes ROI. This involves balancing the cost of labor against the
anticipated revenue increase from improved customer satisfaction.

2.7 Prediction
The model allows us to predict future revenue under different levels of investment in
customer satisfaction. This predictive capability is instrumental in making informed
decisions regarding budgeting for labor costs.