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April 13, 2023

Incorporating Behavioral Economics in Decision Making Through Conjoint Analysis

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Agenda

2 Economics and Market Research

3 Introduction to Status Quo Bias (SQB)

4 Implication of SQB in Market Research

5 Incorporating SQB in Market Research through Conjoint Analysis

6 Results, Findings and Impact

Neoclassical Economics Behavioral Economics

1 Background

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What could have gone wrong with this business decision that was purely data driven?

The answer lies in the detail, technique employed in market research missed a key aspect of consumer behavior in decision making…… Let’s Understand

Believes in Data

Brand Manager for Yummy Cookies (YC).. Already three flavors in the market with

lots of competitors

Background

Mr. RossYC Plans to launch new

Strawberry Flavor cream Cookies

Not sure about expected market share, Mr. Ross

decides to go for Market Research through Conjoint

Analysis

Predicts 15% Market Share and decides on a $20mn investment

Actual Market Share10%

Revenue Generated$15mn

Net Loss$5mn

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Key question … Is the Neoclassical Economics based technique holistic ????

Neoclassical Economics is Key Element of Traditional Market Research Techniques

Market Research

Techniques

Conjoint Analysis

Based on Neoclassical Economics Follow statistical, analytical & quantitative

approach

A technique to capture consumer’s preferences in real life

Consumers are assumed to make rational decisions

Preference shares are calculated by maximizing utility G

over

ned

by

Neoclassical Economics

Rationality

Utility

Max

imiza

tion Cost M

inimization

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Questioning Traditional Wisdom

Do consumers always think rationally? Are there any other factors affecting consumer behavior and decision making ?

However, Behavioral Economics Plays a Key Role in Decision Making

These questions cannot be accounted for using neo – classical economics, hence an analysis done on strictly traditional lines tends to give an incomplete picture of the consumer psyche. This is where Behavioral Economics comes into play

Behavioral Economics brings in new dimensions to the traditional economic theory and studies the effects of social, cognitive and emotional factors on consumer decision making

Behavioral Economics

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Immediacy Effect (Discounting the future ): Caring more about well being now versus at a later stage

Halo Effect (Anchoring/Benchmarking):Using an initial piece of information to make subsequent judgments

Risk Aversion:Tendency of an individual to avoid Risk when making choice under uncertainty

Confirmation Bias:The tendency of individuals to favor information that confirms their beliefs or social beliefs

Status Quo Bias… How it affects Market Research???

Key Concepts in Behavioral Economics

Status Quo Bias (Loss Aversion):

Tendency of an individual to stick to current state of affairs

Attribute Priming:

The influence of prior exposure resulting in activation of consumer’s mind space to certain feature/ attribute

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Status Quo Bias is a cognitive bias that results from, • A higher preference for the current state of affairs• Change from the current status being perceived as a loss. Hence, impacts decision making

Should I buy this new product?

NO ! I will maintain my current purchase decision

Yes

Status Quo Bias in Decision Making

Holistic view of aConsumer’s Purchase Decision

Behavioral EconomicsEmotional & Cognitive

Behavior

Neoclassical EconomicsRationality & Utility

Maximization

Incorporating Status Quo Bias in research is important in order to evaluate the consumer’s purchase decision holistically

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BUT !

Accordingly…

Conjoint Analysis, a market research technique, is very commonlyused to predict shares of new products in the market

Incorporating Status Quo Bias in Market Research

In its current framework, it does not fully account for the softer aspectof consumer’s decision making such as Status Quo Bias

The following slides elaborate the approach to incorporate Status Quo Bias in Conjoint Analysis

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Typical Conjoint (CBC) Framework (without incorporation of SQB)

The propensity of selection of an absolutely new product offerings tends to be high, due to,

Out of the following product options, please indicate the option that you are most likely to purchase

Option 1 Option 2 Option 3 Option 4

Brand Brand C Brand A Brand E

None of these optionsFlavor Flavor 2 Flavor 1 Flavor 3

Price (Rs) 11 13 10

Preferred Choice o o o

Respondents are asked to choose among three product concepts and one “None”

Lower time involved in decision making

No risks involved for making a wrong choice and

Attractive presentation of the new product options in the survey

A Typical Conjoint (CBC) Framework

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Option 1 Option 2 Option 3

Brand Brand A Brand D Brand C

Flavor Flavor 1 Flavor 2 Flavor 3

Price (Rs) 11 13 8

Preferred Choice o o

Incorporation of Status Quo Bias in Conjoint – Absolutdata’s Three Step Approach

“Status Quo Bias” in Conjoint – Absolutdata’s three step approach

Which among the following is your most preferred product ?

o Brand A – Flavor 1 o Brand A – Flavor 2 o Brand B – Flavor 2o Brand C – Flavor 1 o…..

Brand B – Flavor 1Step 1 – Selecting ‘most preferred

product’ before the conjoint exercise

Step 2 – Making a choice out of the available product

concepts in a choice task

You mentioned that you will chose “Brand D – Flavor 2” if available in the market. Are you willing to replace it with “Brand B- Flavor 1” if available at the same price?

oYes oNo

Step 3 – Capturing willingness to replace ‘most

preferred product’ with conjoint

product

Step 3, which probes the respondent about willingness to replace his/her most preferred product captures the inertia of a respondent to change from the current state of affairs, hence capturing SQB

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Absolutdata’s Hypothesis – Incorporation of SQB in conjoint will lead to…

Reduction in shares of new products

Highest reduction in shares if a new brand launches a new product

Increase in shares of the market leader

But Does This Approach Really Works? Absolutdata’s Proof of Concept

Implementation of the three step approach - How did we do it?

A comparative study of Choice Based Conjoint (CBC) (control group) and conjoint with Absolutdata’s SQB framework (test group) was undertaken using an online survey

The category was chosen from amongst the packaged food industry and had a clear market leader. New entrants had a hard time drawing shares

Each product in the conjoint exercise was defined by three attributes – Brand, Flavor and Price; having six levels each

Control Group Test Group

Similar set of respondents

Administered CBC Administered Conjoint with SQB framework

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56%

18%

9%3%

13%1%

80%

2% 1% 0%

16%

0%

CBC Conjoint with SQB Framework

Product No. 1 2 3 4 5 6

Brand Brand A Brand A Brand B Brand B Brand C Brand F

Flavor Flavor 1 Flavor 2 Flavor 1 Flavor 2 Flavor 1 Flavor 6

Price ₹ 10 ₹ 12 ₹ 10 ₹ 12 ₹ 10 ₹ 10

Preference Shares

Shares of new products reduced as we moved to the SQB conjoint

Share of the market leader increased on moving to the SQB conjoint

New Brand/Flavor

New Product

Results: There is a Significant Decline in New Product Shares After Incorporating SQB

Results – Shares from Market Simulation

Forecasted shares in SQB framework tend to be very near to the actual market reality

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More Results: Other Hypothesis Also Proved Without Impacting Key Consumer Behavior

Results – Reduction in shares of New Products

Reduction in shares were the highest if a new brand launches a new flavor

S. No. Brand Flavor Price

1 Brand F Flavor 6 10

2 Brand F Flavor 1 10

3 Brand A Flavor 6 10 89%

64%

97%

% Reduction in shares

Note – Reduction measured when we look at shares from normal CBC to that of CBC with SQB framework

New Brand/Flavor

Maximum % reduction in shares

Results – Attribute Importance

The order of attribute importance was the same in both the conjoints, Brand followed by Flavor and Price, showing consistency in consumer behavior

Attribute

Brand

Flavor

Price 11%

41%

48%

17%

33%

49%

Traditional Conjoint Conjoint with SQB Framework

Attribute ImportanceAs expected ‘Brand’ comes out to be the most important attribute

Degree of importance for ‘Flavor’ is higher in Conjoint with SQB framework

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Hypothesis Verified

True False

Shares of new products were reduced

Reduction in shares was the highest if a new brand launched a new product

Share of market leader was increased

Absolutdata’s Hypothesis

Various hypothesis tested through the study were proven to be true when we moved to the conjoint with SQB framework

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Impact of Absolutdata’s Conjoint with SQB Framework Incorporated

YC Plans to launch new high fiber Cookies

Mr. Ross decides to go for Market

Research through Conjoint Analysis

Predicts 10% Market Share and decides on a $10mn

investment

Revenue Generated $12mn

Net Profit $2mn

SQB incorporated Conjoint Framework resulted in more Accurate and Realistic market shares thus resulting in higher Returns on Investment

He now knows that Consumers’ behavior

affects decision making and so goes for SQB

incorporated Conjoint Analysis

Actual Market Share9%

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Applications in Industry

There could be a Ross in any of the industries where consumers have a strong brand loyalty and deep emotional connect with their favorite products, like:

Automobiles

Cosmetics

CigarettesPackaged foods

Beverages

Relevance in different industries

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