Conjoint Analysis

Conjoint Analysis : 

Conjoint Analysis MGT 453

A simple example : 

A simple example We want to market a new golf ball. There are three important product features. Average Driving Distance Average Ball Life Price

Figure 1 : 

Figure 1

Slide 4: 

Obviously, the “ideal” ball from consumers’ view is: Average Driving Distance: 275 yards Average Ball Life: 54 holes Price: $1.25 The “ideal” ball from manufacturers’ view is: Average Driving Distance: 225 yards Average Ball Life: 18 holes Price: $1.75 Lose money selling the first, but consumers won’t be happy with the second option.

Figure 2 (average life vs. average distance) : 

Figure 2 (average life vs. average distance)

Slide 6: 

Both buyers agree on the most and the least preferred ball. But from other choices, buyer 1 tends to trade-off ball life for distance. Buyer 2 makes the opposite trade-off. The differences between Figure 2 and 1 are the essence of conjoint analysis.

Figure 3 (average life vs. average distance) : 

Figure 3 (average life vs. average distance)

Figure 4 (average life vs. price) : 

Figure 4 (average life vs. price)

Slide 10: 

We can pick any set of combinations and figure out the utility or part-worths to buyer 1. Three steps form the basics of conjoint analysis. Collecting trade-offs Estimating buyer value systems Making choice predictions How to generalize this to different balls and a representative sample

Conjoint Study Process : 

ME Conjoint Analysis 2006 - 11 Stage 1 —Designing the conjoint study: Step 1.1: Select attributes relevant to the product or service category, Step 1.2: Select levels for each attribute, and Step 1.3: Develop the product bundles to be evaluated. Stage 2 —Obtaining data from a sample of respondents: Step 2.1: Design a data-collection procedure, and Step 2.2: Select a computation method for obtaining part-worth functions. Stage 3 —Evaluating product design options: Step 3.1: Segment customers based on their part-worth functions, Step 3.2: Design market simulations, and Step 3.3: Select choice rule. Conjoint Study Process

Slide 12: 

Step 1.1. Select attributes levels Focus group Ask new product development team Secondary data Should not use too many attributes Step 1.2. Select levels of attributes Choose attribute levels similar to the existing products As few levels as possible to simplify respondents task Roughly the same number of level for each attribute Step 1.3. Use orthogonal design to develop product bundles

Simple Example ofConjoint Analysis : 

ME Conjoint Analysis 2006 - 13 Simple Example ofConjoint Analysis

Simple Example ofConjoint Analysis : 

ME Conjoint Analysis 2006 - 14 Simple Example ofConjoint Analysis

Slide 15: 

Stage 2 Obtaining Data from respondents Step 2.1 Pairwise evaluation Rank-ordering product bundles Evaluatiing products on a rating scale

Slide 16: 

ME Conjoint Analysis 2006 - 16 Type of crust (3 types) Type of cheese (3 types) Price (3 levels) Attributes Topping (4 varieties) Amount of cheese (2 levels) A total of 216 (3x4x3x2x3) different pizzas can be developed from these options! Crust Topping Type of cheese Pan Thin Thick Pineapple Veggie Sausage Pepperoni Romano Mixed cheese Mozzeralla Amount of cheese Price 2 Oz. 6 Oz. $9.99 $8.99 $7.99 Designing a Frozen Pizza Note: The example in the book also has a 4 oz option for amount of cheese.

Designing a Frozen PizzaExample Ratings Data : 

ME Conjoint Analysis 2006 - 17 Designing a Frozen PizzaExample Ratings Data

Conjoint Utility Computations : 

ME Conjoint Analysis 2006 - 18 U(P) = S S aijxij k i=1 m j=1 P: A particular product/concept of interest U(P): The utility associated with product P aij: Utility associated with the jth level (j = 1, 2, 3...kj) on the ith attribute kj: Number of levels of attribute i m: Number of attributes xij: 1 if the jth level of the ith attribute is present in product P, 0 otherwise Conjoint Utility Computations j

Utility Computation(Designing a Frozen Pizza) : 

ME Conjoint Analysis 2006 - 19 Utility Computation(Designing a Frozen Pizza) *Base product is: Pan pizza with pineapple, 2 oz of Romano cheese, and priced at $9.99.

Market Share and Revenue Share Forecasts : 

ME Conjoint Analysis 2006 - 20 Define the competitive set – this is the set of products from which customers in the target segment make their choices. Some of them may be existing products and, others concepts being evaluated. We denote this set of products as P1, P2,...PN. Select Choice rule Maximum utility rule Share of preference rule Logit choice rule Alpha rule Market Share and Revenue Share Forecasts

Maximum Utility Rule (Example) : 

ME Conjoint Analysis 2006 - 21 Maximum Utility Rule (Example) Under this choice rule, each customer selects the product that offers him/her the highest utility among the competing alternatives. Market share for product Pi is then given by: K is the number of consumers who participated in the study.

Other Choice Rules : 

ME Conjoint Analysis 2006 - 22 Other Choice Rules Share of utility rule: Under this choice rule, the consumer selects each product with a probability that is proportional to the utility of that compared to the total utility derived from all the products in the choice set. Logit choice rule: This is similar to the share of utility rule, except that it gives larger weights to more preferred alternatives and smaller weights to less preferred alternatives. Alpha rule: Modified version of share of utility rule. Before applying the share of utility, the utility functions are modified by an “alpha” factor so that the computed market shares of existing products are as close as possible to their actual market shares.

Market Share Computation (Designing a Frozen Pizza) : 

ME Conjoint Analysis 2006 - 23 Market Share Computation (Designing a Frozen Pizza) Consider a market with three customers and three products:

Market Share Computation (Designing a Frozen Pizza) : 

ME Conjoint Analysis 2006 - 24 Market Share Computation (Designing a Frozen Pizza) Utility (Value) of each product for each customer. Maximum Utility Rule: If we assume customers will only buy the product with the highest utility, the market share for Meat Lover’s treat is 2/3 and for Veggie Delite is 1/3. Share of preference rule: If we assume that each customer will buy each product in proportion to its utility relative to the other products, then market shares for the three products are: Aloha Special (27.2%), Meat Lover’s Treat (27.9%) and Veggie Delite (44.9%).

Identifying Segments Based onConjoint Part Worths : 

ME Conjoint Analysis 2006 - 25 Identifying Segments Based onConjoint Part Worths

Product Design for Specific Segments : 

ME Conjoint Analysis 2006 - 26 Product Design for Specific Segments Design optimal product by segment Segment 1 (Value segment – 52% of the market): A thick-crust pizza with 6 Oz mixed cheese and pineapple (or sausage) topping priced at $7.99. This will get about 32% share and revenue index of around 100 (the same as the base product). Segment 3 (Premium segment -- 27.5% of the market): A pan pizza with 2 Oz of Romano cheese and pepperoni or sausage topping priced at $9.99. This will get 31% share of this segment and have revenue index of about 100.

Next class: Advertising & Promotion : 

Next class: Advertising & Promotion