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# 1.2 Business context

Let us delve deeper into these practical business scenarios to illustrate how hypothesis testing can be applied in real-world situations.

Consider a market research scenario where Apple is evaluating the pricing strategy for its latest iPhone model. A respondent in a focus group states that ‘Apple iPhones are too expensive’. While this statement provides some insight, it lacks the specificity required for rigorous testing. However, if the respondent specifies that an Apple iPhone costing over £500 is too expensive, we can formulate a testable hypothesis:

- H0: The price of an Apple iPhone at £500 is not considered expensive by consumers.

- H1: The price of an Apple iPhone at £500 is considered expensive by consumers.

Figure 3 iPhone

To test such a hypothesis, Apple’s market research team might design a comprehensive survey to gather data from a representative sample of consumers. They could pose questions about price point perceptions, purchase intentions at specific price levels, and how the £500 price tag compares to consumer expectations. The subsequent analysis of survey responses using statistical methods would provide evidence either supporting or refuting the alternative hypothesis. The outcomes of this hypothesis test could significantly influence Apple’s pricing strategy, potentially leading to price adjustments, enhanced value propositions, or product line segmentation to offer more affordable options.

As another example, if we believe that the average annual salary in the UK is approximately £26,000, that can be considered as the null hypothesis, given that we are in agreement with the belief. Thus, we have:

- H0: The average annual salary in the UK is equal to £26,000.

- H1: The average annual salary in the UK is not equal to £26,000.

Testing these hypotheses would involve collecting salary data from a representative sample of UK workers through large-scale surveys, analysis of government data, or information from job postings and recruitment agencies. Once the data is collected, decision-makers would use statistical tests (we will introduce them later) to determine whether we would reject the null hypothesis.

By formulating clear and testable hypotheses, businesses can design appropriate tests, gather relevant data, and draw meaningful conclusions. This process enables leaders to make informed decisions based on statistical evidence rather than assumptions or intuitions. For instance, in the iPhone pricing scenario, Apple could use the results to fine-tune their pricing strategy for different markets, develop marketing messages that address price perceptions, and inform product development decisions to align with consumer value expectations. In the salary investigation case, businesses could adjust their compensation packages to attract and retain talent, benchmark their salaries against industry standards, and forecast labour costs more accurately for financial planning.

As you progress in your studies and career, remember that mastering the art of hypothesis formulation and testing is crucial for effective business decision-making. It allows you to ask the right questions, design robust analyses, and interpret results accurately. In today’s data-driven business landscape, the ability to formulate and test hypotheses can provide a significant competitive advantage, enabling you to uncover insights that drive innovation and success. Whether you are launching a new product, entering a new market, or optimising internal processes, embracing this scientific approach to decision-making will equip you to navigate the complexities of modern business and drive your organisation towards data-informed success.

## Activity 1: Null hypothesis versus alternative hypothesis

Allow around 10 minutes for this activity.

Read the following statements. Can you develop a null hypothesis and an alternative hypothesis?

‘It is believed that a high-end coffee machine produces a cup of caffè latte with an average of 1 cm of foam. The hotel employee claims that after the machine has been repaired, it is no longer able to produce a cup of caffè latte with 1cm foam.’

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### Answer

H0: The coffee machine makes a cup of caffè latte with 1cm foam on average.

H1: The coffee machine does not make a cup of caffè latte with 1cm foam on average.

If you have developed the hypotheses H0 and H1 as mentioned above, you have shown that you are familiar with the structure of different types of hypotheses.

◄Contents►Next: 1.3 Hypothesis formulation

OpenLearn - Data analysis: hypothesis testing
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