Introduction to Conjoint Analysis Raj Echambadi

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Introduction to Conjoint AnalysisRaj
Echambadi
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Different Perspectives, Different Goals

• Buyers want all of the most desirable features at
  lowest possible price
• Sellers want to maximize profits by 1)
  minimizing costs of providing features 2)
  providing products that offer greater overall
  value than the competition

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Attributes and Levels of a Product
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Buyers Want!
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Sellers Want!
The answer is in between! But where?
Conjoint enables us to figure out the customer
preferences first and then build the product
accordingly!
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Nike Golfs Problem?

• How much do consumers value Nike Golf balls
  compared to the competition?

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How to Learn What Customers Want?

• Ask Direct Questions about preference
• What driving distance do you prefer?
• How long do you expect Golf balls to last?
• What price do you prefer?
• PROBLEM?

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Problems with Direct Questioning

• Answers are often trivial and useless
• I prefer longer distances to less
• I prefer longer lasting Golf balls to less
• I prefer a lower price to a higher price

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How to Learn What Is Important?

• Ask Direct Questions about Importances
• How important is it that you get the Brand /
  Driving Distance / Ball Life / Price that you
  want?
• PROBLEM?

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Stated Importances

• Importance Ratings often have low discrimination
  with most responses falling in most important
  categories

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The Conjoint MantraProducts are Composed of
Attributes

• Preference for a Golf Ball Brand Driving
  Distance Ball Life Price.

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Background What is Conjoint? (cont.)

• The attributes we measure must be levelable
• Brand Nike, Titleist
• Driving Distance 275, 250, 225 yards
• Life 54, 36, 18 holes
• Price 1.25, 1.50, 1.75
• If we learn how much value (utility) people have
  for each of these levels, we can add them up and
  predict how much they would like potential Golf
  balls we could offer.

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Traditional Conjoint Method

• Titleist
• 225 yards
• 18 holes
• 1.25
• Your ranking ___________

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Traditional Conjoint Method

• Nike
• 275 yards
• 18 holes
• 1.25
• Your ranking ___________

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Conjoint is done at an individual level first!
Derivation of Segments
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Conjoint Utilities (An Illustrative Example)

• Numeric values that reflect how desirable
  different features are
• Feature Utility
• 275 yards 2.5
• 250 yards 2.0
• 225 yards 1.8 1.25 7.3
• 1.50 5.1 1.75 2.2
• Titleist 2.3
• Nike 1.8
• 54 holes 3.0
• 36 holes 2.0
• 18 holes 1.0

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Market Simulation Example

• Let us assume that Titleist has a standard
  product that is the market share leader with the
  following attributes 225 yards, 36 holes,
  1.50).
• How will Nike perform with a similar Golf ball?
  (Nike, 225 yards, 36 holes, 1.50)? Titleist
  2.3 1.8 2.0 5.1 11.2
• Nike 1.8 1.8 2.0 5.1 10.7
• Respondent 1 will always choose Titleist in this
  case.
• Accumulate respondent predictions to make shares
  of preference.

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Market Simulation Example II

• What if Nike decides on a different product
  profile?
• 225 yards, 36 holes, 1.25)? Titleist 2.3
  1.8 2.0 5.1 11.2
• Nike 1.8 1.8 2.0 7.3 13.9
• Respondent 1 will choose Nike in this case.
• Accumulate respondent predictions to make shares
  of preference.

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PCs Market Simulation I

• Base Case
• Acer 34
• Compaq 32
• IBM 34
• Acer first adopts Intel Inside

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PCs Market Simulation - II

• Base Case Acer
• Acer 38 4
• Compaq 30 - 2
• IBM 32 - 2
• Compaq next adopts Intel Inside

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PCs Market Simulation - III

• Base Case Acer Compaq
• Acer 36 4 2
• Compaq 34 - 2 2
• IBM 30 - 2 - 4
• IBM next adopts Intel Inside

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PCs Market Simulation - IV

• Base Case Acer Compaq IBM
• Acer 34 4 2 0
• Compaq 32 - 2 2 0
• IBM 34 - 2 - 4 0

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Strategic Source of Brand EquityPrisoners
Dilemma