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Managing Risk in Video Game Development
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# Managing Risk in Video Game Development

May 3, 2013 Page 7 of 9

5. Isolate key variables and assumptions

In this step, we isolate all of the assumption variables from the previous calculations -- that is, all of the variables with an orange background, which had assumption ID numbers listed next to them -- and list them together in one table.

Since we have a full 27 assumptions, we'll show only the first 3 here for the sake of brevity:

For each assumption, we also now estimate upper and lower bound values, along with a distribution type (the cells in blue).  These allow us to specify the potential range of uncertainty around each assumption.  You should pick the widest possible range for each assumption that can reasonably be correct based on the best available data.

All of the variables in this example use a normal distribution.  However, depending on the optimization tool you decide to use, you could also use other distributions, such as a triangular distribution, which would allow you to skew the most likely value toward the upper or lower bound as appropriate.  For example, you might estimate conversion rate between 0-10%, but with lower values between 1-3% being much more likely than higher values, and an expected value of 2%.  In this case, a triangular distribution would allow you to simulate the range for the conversion rate so that it was appropriately skewed toward lower values.

6. Perform a sensitivity analysis on your assumptions

In this step, we run a simulation on the assumption ranges built in step 5 to build a sensitivity analysis indicating the effect of each individual assumption on net profits.   This requires the use of Oracle Crystal Ball or an equivalent simulation tool.

At the end of this step, we should be able to make a tornado graph such as the one below, indicating that some assumptions have a vastly greater effect on profitability than others.  These are the assumptions we should work to test as early as possible.  In this case, retention rate, conversion rate, and new users per month are the top three unknowns with the greatest effect on profitability, so we should work to narrow these down as quickly as possible.

Page 7 of 9

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