Conjoint Analysis

MGT 453

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
Average Driving Distance Average Ball Life Price

275 yards
250 yards 225 yards

54 holes
36 holes 18 holes

$1.25
$1.50 $1.75

 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 wont be happy with the second option.

Figure 2 (average life vs. average distance)

Buyer 1 54 holes 275 yards 250 yards 225 yards Buyer 2 54 holes 275 yards 250 yards 1 2 36 holes 3 5 18 holes 6 8 1 3 7 36 holes 2 5 8 18 holes 4 6 9

225 yards

 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)

Buyer 1 54 holes 275 yards 1 36 holes 2 18 holes 4

250 yards
225 yards

3
7 54 holes 50

5
8 36 holes 25 (2) 125 (5) 85 (8) 25

6
9 18 holes 0 (4) 100 (6) 60 (9) 0

275 yards 100 250 yards 60 225 yards 0

(1) 150 (3) 110 (7) 50

Figure 4 (average life vs. price)

Buyer 1 54 holes $1.25 1 36 holes 4 18 holes 7

$1.50
$1.75

2
3 54 holes 50

5
6 36 holes 25 (4) 45 (5) 30 (6) 25

8
9 18 holes 0 (7) 20 (8) 5 (9) 0

$1.25 20 $1.50 5 $1.75 0

(1) 70 (2) 55 (3) 50

Driving Distance

Ball Life

Price

275 yards
250 yards 225 yards

100
60 0

54 holes
36 holes 18 holes

50
25 0

$1.25
$1.50 $1.75

20
5 0

 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

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.
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 2

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.
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 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 of Conjoint Analysis

Product Option 1 2 3 4 5 6 7 8 Cuisine Italian Italian Italian Italian Thai Thai Thai Thai Distance Near Near Far Far Near Near Far Far Price Range $10 $15 $10 $15 $10 $15 $10 $15 Preference Rank Value

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Simple Example of Conjoint Analysis

Product Option 1 2 3 4 5 6 7 8 Cuisine Italian Italian Italian Italian Thai Thai Thai Thai Distance Near Near Far Far Near Near Far Far Price Range $10 $15 $10 $15 $10 $15 $10 $15 Preference Rank Value 8 6 4 2 7 5 3 1

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 Stage 2 Obtaining Data from respondents Step 2.1

Pairwise evaluation Rank-ordering product bundles Evaluatiing products on a rating scale

Designing a Frozen Pizza

Attributes Type of crust (3 types) Topping (4 varieties) Amount of cheese (2 levels) Type of cheese (3 types) Price (3 levels) Type of cheese Topping Crust
Pan Thin Thick Pineapple Veggie Sausage Pepperoni Romano Mixed cheese Mozzeralla

Amount of cheese
2 Oz. 6 Oz.

Price
$9.99 $8.99 $7.99 Note: The example in the book also has a 4 oz option for amount of cheese.

A total of 216 (3x4x3x2x3) different pizzas can be developed from these options! ME Conjoint Analysis 2006 - 16

Designing a Frozen Pizza Example Ratings Data

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Conjoint Utility Computations

U(P) = S S aijxij
j=1 i=1

kj m

P: U(P): aij: kj: m: xij:

A particular product/concept of interest The utility associated with product P Utility associated with the jth level (j = 1, 2, 3...kj) on the ith attribute Number of levels of attribute i Number of attributes 1 if the jth level of the ith attribute is present in product P, 0 otherwise

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Utility Computation (Designing a Frozen Pizza)

Customers Utility
Base* Thin crust Thick crust Veggie Sausage Pepperoni Mixed Cheese Mozzarella 6 oz $ 8.99 $ 7.99 Cust 1 0 10 15 10 25 30 3 10 10 20 35 Cust 2 45 -5 10 0 5 20 -10 10 15 -10 -5 Cust 3 30 0 0 50 0 0 0 -5 -20 10 20

*Base product is: Pan pizza with pineapple, 2 oz of Romano cheese, and priced at $9.99.
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Market Share and Revenue Share Forecasts

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
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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:

Consumers who prefer i the most MS ( Pi ) K k 1

K is the number of consumers who participated in the study.

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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.
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Market Share Computation (Designing a Frozen Pizza)

Consider a market with three customers and three products:
Aloha Special Pan Pineapple Mozzarella 6 oz $8.99 Meat-Lovers Treat Thick Pepperoni Mixed Cheese 6 oz $9.99 Veggie Delite Thin Veggie Romano 2 oz $7.99

Crust Topping Type of Cheese Amount of Cheese Price

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Market Share Computation (Designing a Frozen Pizza)

Utility (Value) of each product for each customer.Aloha Special Meat-Lovers Treat Veggie DeLite
Customer 1 Customer 2 Customer 3 40 45 30 58 50 10 55 35 100

Maximum Utility Rule: If we assume customers will only buy the product with the highest utility, the market share for Meat Lovers 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 Lovers Treat (27.9%) and Veggie Delite (44.9%).

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Identifying Segments Based on Conjoint Part Worths

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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.

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