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LESSON 36: CONJOINT ANALYSIS

We will now learn of an important technique, which helps us determine the best or optimal combination of product features or attributes. Conjoint measure-ment is the statistical technique typically used to identify the most desirable com-bination of attributes or features for the particular product or service under investigation. This is a highly advanced technique and we shall only be able to touch on it intuitively. A more detailed explanation is beyond the scope of our course. However it is an important technique, which helps a marketing person, decides on what is the optimal combination of product features to be offered. By the end of this lesson you should have an intuitive understanding of what is conjoint analysis and its applications in marketing and other types of research problems. The company aims to provide a service. They wish to test three levels of frequency, and three levels of prices. Further they want to test the weightage given by consumer to add on features such as AC and music. The conjoint problem can be presented as follows: Fare (three levels Rs10, Rs15, Rs 20) Frequency of service (10 minutes, 15 minutes, 20 minutes) AC vs non AC vs. music (Ac & music, AC, music, nothing) A sample of 500 respondents are selected and asked to rank their preferences for all possible combinations and for each level. These are shown below along with one respondents sample rankings. We can present our trade off information in the form of a table: Table 1

What is Conjoint Analysis?

Conjoint analysis is a technique used to identify the most desirable combination of features to be offered in a new product. It addresses the problem of how the customer will value the various tangible and intangible features offered by a particular firms product. Conjoint measurement also tells us the extent to which respondents are willing to give up (trade off) some features and attributes to retain others. Thus conjoint analysis is done to determine what utility a consumer attaches to attributes such as:
Price (high, low,) After sales service (frequent, monthly, yearly, guarantee) Product features

Frequency 10 15 20

Ac 1 5 9

AC&music 2 6 10

Music 3 7 11

Nothing 4 8 12

Conjoint analysis - How it works A consumer is asked to compare different products attribute combinations and rank them. Respondents are to indicate the combination they most prefer, the second most preferred, etc. Conjoint analysis is applied to categorical variables, which reflect different features or characteristics of products. For example for a new product the features may be:
Colour (different shades) Size (largest vs. medium vs. small) Shape (square vs. cylindrical) Price (different price levels)

Basically the respondents preference ranking help reveal how desirable a particular feature is to a respondent. Features respondents are unwilling to give up from one preference ranking to the next are given a higher utility. Thus in the above example the respondent gives a high weightage to service followed by AC. the offer of music is clearly not very important as he ranks it below AC. However he is not willing to trade off frequency of service with either AC or music. Conjoint analysis uses preference rankings to calculate a set of utilities for each respondent where one utility is calculated for each respondent for each attribute or feature. The calculation of utilities is such that the sum of utilities for a particular combination shows a good correspondence with that combinations position in the individuals original preference rankings. The utilities basically show the importance of each level of each importance to respondents. We can also identify the more important attributes by looking at the range of utilities for each of the different levels. For Example
Frequency of service has a range from 1.6 to .04. The

It differs from factor analysis because it is only applied to categorical variables. It is similar to factor analysis in that it tries to identify interdependencies between a number of variables where the variables are the different features. We can best understand Conjoint analysis with the help of an example: Example 1 Suppose we have to design a public transport system. We wish to test the relative desirability of three attributes:

range is therefore equal to =1.2.A high range implies that the respondent is more sensitive to changes in the level of this attribute.
These utilities are calculated across all respondents for all

attributes and for different levels of each attribute. At the end of the analysis we would identify 3-4 of the most popular combinations would be identified for which the relative costs and benefits can be worked out.

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Uses of conjoint analysis

It is used in industrial marketing where a product can have

Onion Onion Onion Onion Onion Onion Onion Onion Onion Chicken Chicken Chicken Chicken Chicken Chicken Chicken Chicken Chicken Chicken Chicken Chicken Vegetable Vegetable Vegetable Vegetable Vegetable Vegetable Vegetable Vegetable Vegetable Vegetable Vegetable Vegetable

80 100 100 100 100 140 140 140 140 80 80 80 80 100 100 100 100 140 140 140 140 80 80 80 80 100 100 100 100 140 140 140 140

no yes yes no no yes yes no no yes yes no no yes yes no no yes yes no no yes yes no no yes yes no no yes yes no no

$1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49 $1.19 $1.49

6 7 6 5 5 7 6 5 5 7 6 2 2 3 3 2 1 2 2 2 1 9 8 7 6 8 7 6 5 6 5 5 4

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many combinations and features and not all features would be important to all consumers. In industrial marketing the analysis can be done at the individual level, as each individual is important.
In case of consumer goods the analysis should be done segment

wise. To avoid unnecessarily long questionnaires a preliminary factor analysis should be run to select only testable attributes. Also the number of attributes should be restricted. Problems It is important that the attributes be selected carefully. The analysis assumes the attributes are important to consumers. We Now Present some Applications of Conjoint Analysis from the Internet. Conjoint helps understand why consumers prefer certain products: U [product] = U [attribute1 (i)] + U [attribute2 (j)] + ... + U[attribute(k)] Where: U [product]=overall utility, or worth of the product U [attribute (y)] = part worth of the yth level of the Xth Attribute J = number of attributes Conjoint analysis is a sophisticated technique for measuring consumer attitudes and preferences. Like the multi-attribute model, it helps understand why consumers prefer certain products. Also like the multi-attribute model, it decomposes overall preference into a series of additive terms. However, there is an important difference between conjoint analysis and the multiattribute model: The multiattribute model is compositional - it builds up an inferred overall attitude as the sum of measured subcomponents.
The conjoint model is deco positional - it measures overall

preference and decomposes this into inferred sub-components. 2. Example of Conjoint Analysis Technique Packaged soups. Four attributes with the following levels: a. Flavor b. Calories c. Salt-free d. Price onion, chicken noodle, country vegetable 80, 100, 140 yes, no $1.19, $1,49

Altogether there are 3x3x2x2 = 36 possible combinations. A consumer could, in theory, rate each of the 36 combinations on a 9-point preference scale. 3. Conjoint Example Packaged Soups Results for One Subject Salt Flavor Onion Onion Onion Cal. 80 80 80 Free yes yes no Price $1.19 $1.49 $1.19 Rating 9 8 6

4. Part-worth calculated for one subject: normalized relative Attribute Flavor onion chicken
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level vegetable 6.25 2.75

mean 6.33 .98 .00

mean 1.00

importance 43%

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Calories

80 100 140

6.33 4.83 4.17 6.06 4.17 5.44 4.78

1.00 .58 .40 .92 .40 .75 .56

26%

9. Airline Example: Discussion a. Interpretation of results b. Selecting attributes

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Salt-Free Price

yes no $1.19 $1.49

23% 8%

c. Selecting attribute levels d. Applications to market segmentation e. Applications to product development 10. Example Conjoint analysis for faculty chair candidate. Conjoint as aid to decision making. Attributes Used were a. Area of specialization (quantitative, consumer behavior, strategy, management, international) b. Research orientation (star, active, inactive, minor) c. Teaching orientation (star, good, average, below average) d. Current position (chair, full, associate) e. Role in department (work with junior faculty, work with faculty at other schools, work with business community)
Discuss Part-Worths and relative importances for eight

5. Orthogonal Arrays In actual applications, it becomes impossible to present all possible combinations of attributes to a consumer. Consider carpet cleaners: 3 package designs 3 brand names 3 price points Good Housekeeping Seal yes/no Money Back guarantee yes/no b. There are 108 possible combinations? c. Q. what is the fewest number of combinations we can get by with? a. Sum of the number of degrees-of-freedom for the main effects of each attribute: (3-1) + (3-1) + (3-1) + (2-1) + (2-1) = 8 d. We need to find an orthogonal array of 8 profiles, which allows us to estimate all additive main effects in the conjoint model. Typically, we at least double the minimum number for greater stability. Issues in designing a conjoint study a. Attribute selection b. Collecting preference data c. Typical sample sizes d. Profile vs. two-factor evaluation e. Computerized (adaptive) approaches 7. Desirable problem situations for conjoint analysis a. Product is realistically decomposable b. Product is reasoned high-stake decision c. All combinations that are presented to respondent are reasonable d. Product/service alternatives can be realistically described e. New product alternatives can be synthesized from basic attributes 8. Airline Example: Stages a. Develop relevant set of attributes and select appropriate levels b. Use a fractional factorial design to create an orthogonal array of stimuli. c. Rate or rank the stimuli d. Estimate part-worths for attribute levels. e. Estimate relative importance of attributes f. Interpretation

faculty members.
Discuss use of non-metric data and monotone

transformation of faculty rank orders, which optimized the fit of the conjoint model Sawtooth Software Research Paper Series Understanding Conjoint Analysis in 15 Minutes Joseph Curry, Sawtooth Technologies, Inc. 1996 Copyright 1996 - 2001, Sawtooth Software, Inc. 530 W. Fir St. Sequim, WA 98382 (360) 681-2300 www.sawtoothsoftware.com Understanding Conjoint Analysis in 15 Minutes Joseph Curry (Originally published in Quirks Marketing Research Review) Copyright 1996, Sawtooth Software Conjoint analysis is a popular marketing research technique that marketers use to determine what features a new product should have and how it should be priced. Conjoint analysis became popular because it was a far less expensive and more flexible way to address these issues thanconcept testing. The basics of conjoint analysis are not hard to understand. Ill attempt to acquaint you withthese basics in the next 15 minutes so that you can appreciate what conjoint analysis has to offer. A simple example is all thats required.

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Suppose we want to market a new golf ball. We know from experience and from talking withgolfers that there are three important product features: ! Average Driving Distance ! Average Ball Life ! Price We further know that there is a range of feasible alternatives for each of these features, for instance: Average Driving Distance Average Ball Life Price 275 yards 54 holes $1.25 250 yards 36 holes $1.50 225 yards 18 holes $1.75 Obviously, the markets ideal ball would be: Average Driving Distance Average Ball Life Price 275 yards 54 holes $1.25 and the ideal ball from a cost of manufacturing perspective would be: Average Driving Distance Average Ball Life Price 225 yards 18 holes $1.75assuming that it costs less to produce a ball that travels a shorter distance and has a shorter life. Heres the basic marketing issue: Wed lose our shirts selling the first ball and the market wouldnt buy the second. The most viable product is somewhere in between, but where? Conjoint analysis lets us find out where. A traditional research project might start by considering the rankings for distance and ball life in Figure 1. Figure 1 Rank Average Driving Distance Rank Average Ball Life 1. 275 yards 1 54 holes 2. 250 yards 2 36 holes 3. 225 yards 3 18 holes This type of information doesnt tell us anything that we didnt already know about which ball toproduce. Now consider the same two features taken conjointly. Figures 2a and 2b show the rankings of the 9 possible products for two buyers assuming price is the same for all combinations. Figure 2a Buyer 1 Average Ball Life 54 holes 36 holes 18 holes 275 yards 1 2 4 250 yards 3 5 7 Average Driving Distance 225 yards 6 8 9 Figure 2b Buyer 2 Average Ball Life 54 holes 36 holes 18 holes 275 yards 1 3 6

250 yards 2 5 8 Average Driving Distance 225 yards 4 7 9 Both buyers agree on the most and least preferred ball. But as we can see from their other choices, Buyer 1 tends to trade-off ball life for distance, whereas Buyer 2 makes the oppositetrade-off. The knowledge we gain in going from Figure 1 to Figures 2a and 2b is the essence of conjointanalysis. If you understand this, you understand the power behind this technique. Next, lets figure out a set of values for driving distance and a second set for ball life for Buyer 1so that when we add these values together for each ball they reproduce Buyer 1s rank orders. Figure 3 shows one possible scheme. Figure 3 Buyer 1 Average Ball Life 54 holes 50 36 holes 25 18 holes 0 275 yards 100 (1) 150 (2) 125 (4) 100 250 yards 60 (3) 110 (5) 85 (6) 60 Average Driving Distance 225 yards 0 (7) 50 (8) 25

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(9) 0 Notice that we could have picked many other sets of numbers that would have worked, so thereis some arbitrariness in the magnitudes of these numbers even though their relationships to eachother are fixed. Next suppose that Figure 4a represents the trade-offs Buyer 1 is willing to make between ball life and price. Starting with the values we just derived for ball life, Figure 4b shows a set of valuesfor price that when added to those ball life reproduce the rankings for Buyer 1 in Figure 4a. Figure 4a Buyer 1 Average Ball Life 54 holes 36 holes 18 holes $1.25 1 4 7 $1.50 2 5 8 Price $1.75 3 6 9 Figure 4b Buyer 1 Average Ball Life 54 holes 50 36 holes 25 18 holes 0 $1.25 20 (1) 70 (4) 45 (7) 20 $1.50 5 (2) 55 (5) 30 (8) 5 Price $1.75 0 (3) 50 (6) 25

(9) 0 We now have in Figure 5 a complete set of values (referred to as utilities or part-worths) thatcapture Buyer 1s trade-offs. Figure 5 275 yards 100 54 holes 50 $1.25 20 250 yards 60 36 holes 25 $1.50 5 225 yards 0 18 holes 0 $1.75 0 Average Driving Distance Average Ball Life Price Lets see how we would use this information to determine which ball to produce. Suppose we were considering one of two golf balls shown in Figure 6. Figure 6 Distance Ball Long-Life Ball Distance 275 250 Life 18 54 Price $1.50 $1.75 The values for Buyer 1 in Figure 5 when added together give us an estimate of his preferences. Applying these to the two golf balls were considering, we get the results in Figure 7. Figure 7 Buyer 1 Distance 275 100 250 60 Life 18 0 54 50 Price $1.50 5 $1.75 0 Total Utility 105 110 Distance Ball Long-Life Ball Wed expect buyer 1 to prefer the long-life ball over the distance ball since it has the larger total value. Its easy to see how this can be generalized to several different balls and to a representative sample of buyers. These three stepscollecting trade-offs, estimating buyer value systems, and making choice predictions form the basics of conjoint analysis. Although trade-off matrices are useful for explaining conjoint analysis as in this example, not many researchers use them nowadays. Its easier to collect conjoint data by having respondents rank or rate concept statements or by using PC-based interviewing software that decides what questions to ask each respondent, based on his previous answers. As you may expect there is more to applying conjoint analysis than is presented here. But if you understand this example, you understand what conjoint analysis is and what it can do for you as a marketer. Point to Ponder Conjoint analysis is a technique that typically handles non metric independent variables.
Conjoint analysis allows the researcher to determine the

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importance of product or service attributes and the levels of features that are most desirable.
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 Respondents provide preferences data by ranking or rating cards

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that describe products

These data become utility weight of product characteristics by

means of optimal scaling and loglinear algorithms. Notes

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