4 Replies Latest reply: Aug 30, 2012 11:12 PM by 769738 RSS

    Profit Chart ?

    769738
      Hi Everyone,

      I wanna ask How to calculate profit in profit chart/tab on classification model. On the profit setting there are startup cost,incremental cost,incremental revenue, budget, etc. I know how to calculate lift score but I don't know how to calculate profit/ROI with all those component. Any clue how to calculate profit and ROI ?

      Thanks

      Edited by: Bayesian on Aug 24, 2012 1:10 AM
        • 1. Re: Profit Chart ?
          Denny Wong-Oracle
          How to compute Profit:

          Assume Quantile = 20 (I just pick quantile = 20 for this example)
          Targets Cumulative at Quantile 20 = 18 (this value can be found in the lift chart/data)
          Non Targets Cumulative at Quantile 20 = 2 (this value can be found in the lift chart/data)
          Total Targets = 100 (Targets Cumulative at last Quantile + Non Targets Cumulative at last Quantile)
          Startup Cost = 1000 (user input)
          Incremental Revenue = 10 (user input)
          Incremental Cost = 5 (user input)
          Budget = 10000 (user input)
          Population = 2000 (user input)

          Profit = -1 * Startup Cost + (Incremental Revenue * Targets Cumulative - Incremental Cost * (Targets Cumulative + Non Targets Cumulative)) * Population / Total Targets
          Profit = -1 * 1000 + (10 * 18 - 5 * (18 + 2) * 2000 / 100 = 600


          How to compute ROI:

          ROI = ((profit - cost) / cost) * 100, where profit = Incremental Revenue * Targets Cumulative, cost = Incremental Cost * (Targets Cumulative + Non Targets Cumulative)
          ROI = ((180 - 100) / 100) * 100 = 80


          Hope this help!
          • 2. Re: Profit Chart ?
            769738
            Thanks a lot dwong, Now I can calculate the profit and ROI.

            One more thing, I'm a little bit confuse about definition of variables which is used for this calculation :

            1. Startup cost : total startup cost (fixed cost)
            2. Incremental revenue : estimated revenue that results from a sale or new customer.
            3. Incremental Cost : estimated cost that results from a sale or new customer.
            4. Budget : What does budget mean ? since the variable was not using for profit calculation+
            5. Population : number of population/cases

            is it right ?

            What does it mean if we get profit $600 and ROI 80% in 2000 population (quantile 20). Can you explain a little bit about this ?

            Many Thanks
            • 3. Re: Profit Chart ?
              Denny Wong-Oracle
              Hi Bayesian

              Your variable definitions seem right. About the Incremental cost, you can think of it as a cost to promote a sale. For example, in a mail order campaign, it could be a cost to mail a catalog to a customer.

              The budget is used to calculate how much population it can cover based on user supplied variables.

              For example,

              Startup Cost = 1000 (user input)
              Incremental Revenue = 10 (user input)
              Incremental Cost = 5 (user input)
              Budget = 10000 (user input)
              Population = 2000 (user input)

              So each quantile contains 20 cases (total population / number of quantiles = 2000/100)

              The cost to promote a sale in each quantile = $5 * 20 (Incremental Cost * number of cases per quantile) = $100

              The cumulative costs of quantiles are:

              Quantile Cost
              1 $1100 ($100 + start up cost of $1000)
              2 $1200
              : :
              20 $3000
              : :
              90 $10000
              : :
              100 $11000

              The $10000 budget can covers the first 90 quantiles of population (you should see the budget line drawn in the profit chart on the 90th quantile).


              Question: What does it mean if we get profit $600 and ROI 80% in 2000 population (quantile 20). Can you explain a little bit about this ?
              Answer: Use the mail order campaign as an example, it means if you mail catalogs to first 20 quantiles of population (400), it will generate a profit of $600 (which has ROI of 80%).

              If you randomly mail the catalogs to first 20 quantiles of customers (Targets Cumulative = 10, Non Targets Cumulative = 10), the profit you get would be:
              Profit = -1 * Startup Cost + (Incremental Revenue * Targets Cumulative - Incremental Cost * (Targets Cumulative + Non Targets Cumulative)) * Population / Total Targets
              Profit = -1 * 1000 + (10 * 10 - 5 * (10 + 10)) * 2000 / 100 = -$1000 (no profit)

              Hope this help!
              • 4. Re: Profit Chart ?
                769738
                Thanks dwong you're very helpful