From the course: Introduction to Career Skills in Data Analytics

Understanding the value of data-driven decision-making

From the course: Introduction to Career Skills in Data Analytics

Understanding the value of data-driven decision-making

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- If I told you that we have an opportunity to purchase a product, and that it was going to make a million dollars in the first year, you would get excited, right? That one number sounds amazing to people. Some people would immediately look at that number and begin to act; that is a data-driven decision. In our scenario, our company thought the product at cost was a steal of a deal, and they bought it all with the hopes that a million in revenue would produce a large profit. The only problem is that million dollar number is only the top line and in no way reflects the impact to the bottom line. When people get a single number in their mind, they can miss the other more important numbers, and it can have damaging consequences. Let's take our million-dollar project and break it down. The company bought the product at cost, and the company will sell the product at a list price, and the difference between that cost and the list price is the margin. All the numbers here, cost, list and margin, matter but of the three, the margin matters the most. It's important to remember that a million in revenue does not equal a million in profit. Our profit is made by the margin. Some people see that margin and get excited, but if you stop there, you are in trouble. You must account for the items that eat the margin because that eats the profit. When you use data to inform your decision making, you must use the top-down and bottom-up approach together. If you're an experienced person with these types of scenarios, you may have already figured out where this is headed. What do we need to do to produce the distribution of this product? We'll keep it simple. When companies sell products, someone has to sell them and there's a cost to that. And even if it's an online sales model, there are people involved in maintaining the information to make that happen. Let's just say for every $1 of the product, it costs 10 cents of that dollar to pay for the sales process. Then there are other costs: cost to store the product, cost to package the materials, cost to deliver the product. There's cost in infrastructure. Cost to automate sales processes. Payroll costs for people to maintain systems, answer phones, and ensure that delivery is met. If you really dig in, you realize quickly that if everything that is required to make the million in revenue eats up the entire margin, or you sold it at the wrong price, or you get hit with unexpected costs like increase in delivery, increase in storage or changes to tax, you are sunk. And if you can't sell it and you can't hold onto it, that million dollars no longer looks like a gold mine. So the impact of being data informed can ensure you're profitable, and that million dollars is really not a million dollars after all, but a total loss, which is maybe why it was a steal of a deal in the first place.

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