conjoint analysis - part 1/3

Class Outline

• Measuring Consumer Preference

– Problem with intentions-to-buy and self-reported methods

– Conjoint Analysis

Preferences• Intention to buy

– too hard a question– overconfident about buying probability

• Self-reported importance weights– lack of discrimination, everything is important

• Trade-offs– benefits and costs– what is desired most

• Actual purchase data– counts– sales force reports

statedpreferences

revealedpreferences

C o n s u m e r p r e f e r e n c e s

Stated intention-to-buy measures

0

10

20

30

40

50

def. not prob. not maybe prob. yes def. yes

% p

rob

. o

f p

urc

has

e

durables non-durables

C o n s u m e r p r e f e r e n c e s

• Ask Direct Questions about preference :

– What brand do you prefer?– How much RAM do you prefer?– How much hard disk space do you prefer?– What type of monitor do you prefer?– What price do you prefer?

• What is the problem with this?

How to Learn What Customers Want?

Problems with Direct Questioning

• Answers are often trivial and unenlightening

– “I prefer more processor speed to less”– “I prefer more RAM to less”– “I prefer more hard disk space to less”– “I prefer a lower price to a higher price”

More Discrimination from Trade-off Questions

Traditional Approach Average Importance

Ratings

0 2 4 6 8 10

Brand

Scan Time

Resolution

Price

Conjoint StudyAverage Importance

Ratings

0 10 20 30 40 50

Brand

Scan Time

Resolution

Price

Conjoint Analysis

• Useful in 1: Product design2: Pricing3: Segmentation and targeting

The conjoint world: terms and concepts

• Attributes• Attribute levels• Profiles• Utility models• Part-worths• Types of conjoint:

ranking, rating, choice

c o n j o i n t w o r l d

iPhone 5

16GB 32GB 64GB

$199 $299 $399

Black & Slate White & Silver

• Attribute:_________________________• Attribute level:_____________________

iPhone 5

• Attribute: Brand, Memory, Price, Color• Attribute level: Apple/Samsung, 16GB/32GB/64GB, $199/$299,$399, Black/White

16GB 32GB 64GB

$199 $299 $399

Black & Slate White & Silver

Conjoint Analysis

• Conjoint Analysis: A technique that enables a researcher to estimate consumers’ valuations of different attributes– Allows us to understand how consumers make

trade-offs among attributes of products and services

– How much are consumers willing to pay for different attributes?

Example: New Job Choice

SalaryLocation

Option 1

Option 2

$70K

$80K

Conjoint Reveals What People Really Want

Job Attribute

What MBA's Said...

Rank Based on Conjoint

Salary

Region of US

Job Location

People/Culture

Functional Area

Firm Growth

Business Travel

Opp. to Advance

6th

2nd

5th

1st

3rd

7th

8th

4th

1st

2nd

3rd

4th

5th

6th

7th

8th

C o n s u m e r p r e f e r e n c e s

• Force consumers to rank different bundles of attributes

A

B

C

D

E

F

A

C

E

F

B

D

1.

2.

3.

4.

5.

6.

Conjoint Analysis - Intuition

• Using the information contained in consumers’ rankings (or ratings), we can back out what their valuations of different attributes must be:

A

C

E

F

B

D

1.

2.

3.

4.

5.

6.

Suppose both products C and E contains a certainattribute that is not found in A,F,B,D. Then the consumer probably has a high valuation for that attribute

Suppose both products B and D contains a certainattribute that is not found in C,E,A,F. Then the consumer probably has a low valuation for that attribute

Conjoint Analysis - Intuition

Conjoint Analysis: Procedure

1. “Design” a set of product concepts (profiles) - this will usually come in with collaboration with the engineering team

2. Ask respondents to rate/rank those product concepts

3. Based on the respondents’ evaluations of the product concepts, figure out how much utility each attribute provides

Exercise: Smartphone Choice

• Three Attributes1. Brand : Samsung Apple2. Memory : 10GB 20GB3. Price : $150 $200

Exercise: Smartphone Choice

Products Brand Memory(GB) Price($)A Samsung 10 150B Samsung 10 200C Samsung 20 150D Samsung 20 200E Apple 10 150F Apple 10 200G Apple 20 150H Apple 20 200

Exercise: Smartphone Choice

Brand Memory Price Ranking (Utility)

Apple 20 150 8

Samsung 20 150 7

Apple 10 150 6

Apple 20 200 5

Samsung 10 150 4

Samsung 20 200 3

Apple 10 200 2

Samsung 10 200 1

• 8=Most Preferred; 1=Least Preferred

Exercise: Smartphone ChoiceQ1) Measure Brand Value

Brand Memory Price UtilityApple 20 150 8 1

Samsung 20 150 7Apple 10 150 6 2Apple 20 200 5 2

Samsung 10 150 4Samsung 20 200 3

Apple 10 200 2 1Samsung 10 200 1

Average 1.5

Exercise: Smartphone ChoiceQ2) Memory Value

Brand Memory Price UtilityApple 20 150 8

Samsung 20 150 7Apple 10 150 6Apple 20 200 5

Samsung 10 150 4Samsung 20 200 3

Apple 10 200 2Samsung 10 200 1

Average

Exercise: Smartphone ChoiceQ2) Memory Value

Brand Memory Price UtilityApple 20 150 8 2

Samsung 20 150 7 3Apple 10 150 6Apple 20 200 5 3

Samsung 10 150 4Samsung 20 200 3 2

Apple 10 200 2Samsung 10 200 1

Average 2.5

Exercise: Smartphone ChoiceQ3) Price = xxx Utils.

Brand Memory Price UtilityApple 20 150 8

Samsung 20 150 7Apple 10 150 6Apple 20 200 5

Samsung 10 150 4Samsung 20 200 3

Apple 10 200 2Samsung 10 200 1

Average

Exercise: Smartphone ChoiceQ3) Price = xxx Utils.

Brand Memory Price UtilityApple 20 150 8 3

Samsung 20 150 7 4Apple 10 150 6 4Apple 20 200 5

Samsung 10 150 4 3Samsung 20 200 3

Apple 10 200 2Samsung 10 200 1

Average 3.5

Exercise: Smartphone Choice

• $50 = 3.5 (Utility or Ranking)• Apple > Samsung

• 20GB > 10GB1.5 Util. = $( 21.4 )

2.5 Util. = $( 35.7 )

Exercise: Smartphone Choice

• $50 = 3.5 (Utility or Ranking)• Apple > Samsung

• 20GB > 10GB1.5 Util. = $( )

2.5 Util. = $( )

Exercise: Smartphone Choice

• Three Attributes

1. Brand : Samsung Apple (1.5)2. Memory : 10GB 20GB (2.5)3. Price : $150 $200 (3.5)

• Most important attribute: ( Price )• Least important attribute: ( Brand )

Group Exercise – Rating Based Conjoint

Brand Memory Price Rating

Apple 20 150 10

Apple 10 150 8

Apple 20 200 6

Samsung 20 150 7

Apple 10 200 4

Samsung 10 150 5

Samsung 20 200 3

Samsung 10 200 1

• 10=Most Preferred; 1=Least Preferred

1. Brand Value

Brand Memory PriceRespondent1’s

RatingApple 20 150 10Apple 10 150 8Apple 20 200 6

Samsung 20 150 7Apple 10 200 4

Samsung 10 150 5Samsung 20 200 3Samsung 10 200 1

2. Memory Value

Brand Memory PriceRespondent1’s

RatingApple 20 150 10Apple 10 150 8Apple 20 200 6

Samsung 20 150 7Apple 10 200 4

Samsung 10 150 5Samsung 20 200 3Samsung 10 200 1

3. Price = XXX Rating

Brand Memory PriceRespondent1’s

RatingApple 20 150 10Apple 10 150 8Apple 20 200 6

Samsung 20 150 7Apple 10 200 4

Samsung 10 150 5Samsung 20 200 3Samsung 10 200 1

Group Exercise: WTP• $50 = ( 4 ) units• Apple > Samsung

• 20GB > 10GB

• Most important attribute: ( Price )• Least important attribute: ( Memory )

( 3 ) units = $( 37.5 )

( 2 ) units = $( 25 )

Group Exercise: Attribute Importance Weights

• $50 = ( 4 ) units• Apple > Samsung

• 20GB > 10GB

• Q1) Partworth range: the difference between largest and smallest partworths for each attribute

• Q2) Importance weights: = partworth range / (sum of partworth range)

( 3 ) units

( 2 ) units

Group Exercise: Attribute Importance Weights

Q1) Partworth range• $50 difference: 4 units• Apple > Samsung : 3 units• 20GB > 10GB: 2 units

Sum of partworth range = 4 + 3 + 2 = 9

Q2) Importance weights: • Price = 4/9 = 44.4%• Brand = 3/9 = 33.3%• Memory = 2/9 = 22.2%