Introduction to Conjoint Analysis Dr' Amit Joshi

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Introduction to Conjoint AnalysisDr. Amit
Joshi
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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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What is Conjoint Analysis?

• Life is about trade-offs. Conjoint is a way to
  learn how people make trade-offs when confronted
  with different features.
• Mimics the real world we show people products
  and let them tell us how much they like them.
• We vary the features of the product and quantify
  how aspects of the product drive preference.
• Assumption of Conjoint The value (utility) of
  the product is equal to the sum of its parts
  (attributes)
• Computer (Brand) (Processor Speed) (RAM)
  (Monitor) (Price)
• Credit Card Brand Interest Rate Annual Fee
  Credit Limit

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Background What is Conjoint? (cont.)

• The attributes we measure must be levelable
• Brand Dell, Compaq, IBM
• Processor Speed 2 GHz, 3 GHz
• RAM 512 Mb, 1 Gb, 2 Gb
• Price 700, 1,000, 15,00
• 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 PCs we
  could present
• Hypothetical Utilities for
  an Individual
• Computer (Dell) (3 GHz) (1 Gb RAM)
  (1,000)
• (45) (5) (10)
  (5) (25)

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How to Learn What Customers Want?

• Ask Direct Questions about preference (Answers
  often trivial (e.g. respondents prefer low fees
  to high fees, higher credit limits to low credit
  limits)
• What brand do you prefer?
• What Interest Rate would you like?
• What Annual Fee would you like?
• What Credit Limit would you like?
• Ask Direct Questions about importance of the
  attribute!
• How important is it that you get the (brand,
  interest rate, annual fee, credit limit) that you
  want?

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Stated Importance

• Importance Ratings often have low discrimination

Not very actionable!
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How Does Conjoint Analysis Work?

• We vary the product features (independent
  variables) to build many (usually 12 or more)
  product concepts
• Marketers catch-phrase-- Features CONsidered
  JOINTly
• We ask respondents to rate/rank those product
  concepts (dependent variable)
• Based on the respondents evaluations of the
  product concepts, we figure out how much unique
  value (utility) each of the features added
• (Regress dependent variable on independent
  variables betas equal part worth utilities.)

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Whats So Good about Conjoint?

• More realistic questions
  Would you prefer . . .
• 210 Horsepower or 140
  Horsepower17 MPG
  28 MPG
• If choose left, you prefer Power. If choose
  right, you prefer Fuel Economy
• When respondents are forced to make difficult
  tradeoffs, we learn what they truly value

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

• Numeric values that reflect how desirable
  different features areFeature Utility
• Vanilla 2.5Chocolate 1.825 5.335 3.25
  0 1.4
• The higher the utility, the better

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Attribute Importance

• Measure of how much influence each attribute has
  on peoples choices
• Best minus worst level of each attribute,
  expressed in percentage termsVanilla -
  Chocolate (2.5 - 1.8) 0.7 15.225 -
  50 (5.3 - 1.4) 3.9 84.8 ----- -------
  - Total 4.6 100.0

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Market Simulation Example

• Predict market shares for 35 Vanilla cone vs.
  25 Chocolate cone for Respondent 1Vanilla
  (2.5) 35 (3.2) 5.7Chocolate (1.8) 25
  (5.3) 7.1
• Respondent 1 chooses 25 Chocolate cone!
• Repeat for rest of respondents. . .

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Market Simulation Results

• Predict responses for 500 respondents, and we
  might see shares of preference like
• 65 of respondents prefer the 25 Chocolate cone