Probability: Its Use in Business

All models are not perfect mirrors of reality, merely guides for the business professional. But the models of basic integral calculus allow a businessperson to at least apply a few indeterminate variables or scenarios to a model, to price a particular product.

For instance, when desiring to create a new product — say, for instance, a shrimp-flavored potato chip, to be marketed in the United States, one might first conduct a marketing survey of a base of customers, to determine how much these consumers would be willing to pay for such a product. Usually, the cheaper the product, the more consumers would be willing or interested in adding such a product to their biweekly shopping list, although this is not uniformly the case — with certain luxury products the price and the unavailability of a product is part of its attraction. A manager would then, after plotting such responses of consumers to pricing scenarios upon a graph, would pair these against a given set of current and possible economic circumstances. Consumers would no doubt be more willing to pay more for potato chips in a healthy economy, given that such goods are not necessities.

Then, the marketer would attempt to determine what price different markets and different states of overall national economic health could probably sustain, while still covering the costs of production of the new flavor. A number of different probable outcomes would have to be generated from the model, given consumers willingness to pay various prices, the existence in particular markets of competitive substitutes, the economic conditions of the market as a whole, and the variance of the costs of production. Once national marketing and distribution began, moreover, an analysis of projected sales in various demographic and geographic markets would have to be conducted.

The uses of probability in business, thus, are nearly infinite, as they are infinitely important. Although it offers no concrete answers, because it allows for indeterminacy, rather than offering fixed solutions, the use of probability in business mathematical models is a necessary, if occasionally frustrating reality check upon the imagination of business owners and entrepreneurs..