Conjoint analysis Outline

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2 Outline Conjoint analysis as a decompositional preference model Steps in conjoint analysis Uses of conjoint analysis

3 Compositional vs. decompositional preference models Compositional: respondents evaluate all the features (levels of particular attributes) characterizing a product; combining these feature evaluations (possibly weighted by their importance) yields a product s overall evaluation; Decompositional: respondents provide overall evaluations of a series of products composed of various combinations of attribute levels; the overall evaluations are then decomposed into the utilities associated with different levels of the various attributes;

4 Example of a compositional model Consider the following laptop computer: Dell 320 GB hard drive 4 GB of RAM 12.1 inch screen Price of $1,200 On a scale from 0 (lowest) to 10 (highest), how would you rate this computer on each attribute? Assign a total of 100 points to each of the 5 attributes so that the points reflect the relative importance of each attribute.

5 Example of a decompositional model Rank the following four descriptions of laptop computers in terms of overall preference: Profile 1 Profile 2 Profile 3 Profile 3 Brand Dell Apple Dell Apple Size of Hard Drive Amount of RAM Screen size Price $1,200 $1,200 $1,500 $1,200 Rank

6 Basic idea of conjoint analysis Overall utility for a product can be decomposed into the utilities (called part-worths) associated with the levels of the individual attributes of the product; The relative importance of a given attribute is given by the ratio of the part-worth range for that attribute divided by the sum of all part-worth ranges;

7 Steps in conjoint analysis Determine attributes and attribute levels Select product profiles to be measured Choose a method of stimulus presentation Decide on the response method Collect and analyze the data Interpret the results

8 Attributes and attribute levels Identify the relevant product attributes that are considered during choice Select attribute levels that represent the options actually available in the market Trade-off between the completeness of the representation and the complexity of the design

9 Example: Laptop Profiles Brand Hard Drive RAM Screen Price Dell 320 GB 2 GB 15.4 in $1,200 Apple 320 GB 4 GB 15.4 in $1,200 Dell 160 GB 4 GB 15.4 in $900 Apple 320 GB 2 GB 15.4 in $900 Dell 320 GB 4 GB 12.1 in $1,500 Apple 320 GB 2 GB 12.1 in $1,500 Apple 160 GB 4 GB 15.4 in $1,500 Apple 160 GB 2 GB 12.1 in $900 Apple 160 GB 4 GB 12.1 in $1,200 Dell 160 GB 2 GB 12.1 in $1,200 Dell 320 GB 4 GB 12.1 in $900 Dell 160 GB 2 GB 15.4 in $1,500

10 Full factorial designs: Product profiles all possible combinations of the levels of the various attributes are used Fractional factorial designs: a subset of all possible combinations is used orthogonal designs in which each level of one attribute is paired equally with all the levels of other attributes are beneficial

11 Example: Laptop Profiles Brand Hard Drive RAM Screen Price Dell 320 GB 2 GB 15.4 in $1,200 Apple 320 GB 4 GB 15.4 in $1,200 Dell 160 GB 4 GB 15.4 in $900 Apple 320 GB 2 GB 15.4 in $900 Dell 320 GB 4 GB 12.1 in $1,500 Apple 320 GB 2 GB 12.1 in $1,500 Apple 160 GB 4 GB 15.4 in $1,500 Apple 160 GB 2 GB 12.1 in $900 Apple 160 GB 4 GB 12.1 in $1,200 Dell 160 GB 2 GB 12.1 in $1,200 Dell 320 GB 4 GB 12.1 in $900 Dell 160 GB 2 GB 15.4 in $1,500

12 Methods of stimulus presentation Verbal descriptions Apple Laptop with 320 GB of Hard Disk Space, 4 GB of RAM, and a Screen Size of 15.4 inches at a Price of $1,200. Pictures Actual products or prototypes

13 Response method Rankings or ratings of the product profiles in terms of preference, purchase probability, etc. Pairwise comparisons of product profiles in terms of preference, purchase probability, etc. Choice of a product from a set of product profiles

14 Example: Laptop Profiles Brand Hard Drive RAM Screen Price A B Dell 320 GB 2 GB 15.4 in $1, Apple 320 GB 4 GB 15.4 in $1, Dell 160 GB 4 GB 15.4 in $ Apple 320 GB 2 GB 15.4 in $ Dell 320 GB 4 GB 12.1 in $1, Apple 320 GB 2 GB 12.1 in $1, Apple 160 GB 4 GB 15.4 in $1, Apple 160 GB 2 GB 12.1 in $ Apple 160 GB 4 GB 12.1 in $1, Dell 160 GB 2 GB 12.1 in $1, Dell 320 GB 4 GB 12.1 in $ Dell 160 GB 2 GB 15.4 in $1,

15 In-class exercise Using the data in the table, answer the following questions: a. How much utility does each of the two consumers attach to the different levels of the five attributes? (Hint: Compute each consumer s average rating of all the options with a given feature. For example, to figure out how much consumer A values the Apple brand name, compute the average rating of the six Apple laptops.) b. What s the relative importance of the five attributes for the two consumers? c. Consider consumer A s ratings. For this consumer, what s the predicted utility of a Dell computer with 160 GB of hard drive space and 2 GB of RAM, a 12.1 inch screen, and a price of $1,200?

16 Consumer A Consumer B Apple Dell H D 320H D RAM RAM in in $ $ $

17 Consumer A Consumer B Apple Dell H D 320H D RAM RAM in in $ $ $

18 Apple Dell A B HD 160 GB HD 320 GB A B GB RAM 4 GB RAM A B in Screen 15.4 in Screen A B $900 $1,200 $1,500 A B

19 In-class exercise Using the data in the table, answer the following questions: a. How much utility does each of the two consumers attach to the different levels of the five attributes? (Hint: Compute each consumer s average rating of all the options with a given feature. For example, to figure out how much consumer A values the Apple brand name, compute the average rating of the six Apple laptops.) b. What s the relative importance of the five attributes for the two consumers? c. Consider consumer A s ratings. For this consumer, what s the predicted utility of a Dell computer with 160 GB of hard drive space and 2 GB of RAM, a 12.1 inch screen, and a price of $1,200?

20 Consumer A Consumer B Attribute level Mean for level across all profiles Mean as deviation from zero Range on attribute Percentage importance Mean for level across all profiles Mean as deviation from zero Range on attribute Percentage importance Apple % % Dell H D 320H D % % RAM % % 4RAM in % % 15.4in $ % % $ $ =11.74

21 In-class exercise Using the data in the table, answer the following questions: a. How much utility does each of the two consumers attach to the different levels of the five attributes? (Hint: Compute each consumer s average rating of all the options with a given feature. For example, to figure out how much consumer A values the Apple brand name, compute the average rating of the six Apple laptops.) b. What s the relative importance of the five attributes for the two consumers? c. Consider consumer A s ratings. For this consumer, what s the predicted utility of a Dell computer with 160 GB of hard drive space and 2 GB of RAM, a 12.1 inch screen, and a price of $1,200?

22 ME output for laptop computer examples Respondents' Preference Partworths Respondents' preference partworths. The most preferred profiles sum up to 100, the least preferred to 0. Respondents / Attributes and Apple Dell Levels Respondent Respondent Respondents / Attributes and Levels Respondent 1 Respondent

23 Conjoint Study Design Office Star data Attributes and attribute levels of the Conjoint study. Attributes / Levels Level 1 Level 2 Level 3 Ordering Location Less than 2 Within 2-5 Within 5-10 Decreasing Office supplies Very large Large Limited Assortment Unordered Furniture Office Furniture No Furniture Unordered Computers No computers Software only Software and computers Unordered

24 Office Star bundles Bundles Attribute levels for a full-profile, fractional design Conjoint study Attributes / Bundles Bundle 1 Bundle 2 Bundle 3 Bundle 4 Bundle 5 Bundle 6 Bundle 7 Bundle 8 Location Less than 2 Less than 2 Less than 2 Less than 2 Within 2-5 Within 2-5 Within 2-5 Within 2-5 Office supplies Furniture Very large Office Furniture Large No Furniture Computers No computers Software only Limited Assortment No Furniture Software and computers Large Office Furniture Very large Office Furniture Large No Furniture Limited Assortment No Furniture Software only Software only No computers Software only Large Office Furniture Software and computers Attributes / Bundles Location Office supplies Furniture Computers Bundle 9 Bundle 10 Bundle 11 Bundle 12 Bundle 13 Bundle 14 Bundle 15 Bundle 16 Within 5-10 Within 5-10 Within 5-10 Within 5-10 Within 2-5 Within 2-5 Within 2-5 Within 2-5 Very large Large Limited Assortment Large Very large Large Limited Assortment Large No Furniture Office Office Office Office No Furniture No Furniture Furniture Furniture Furniture Furniture No Furniture Software and Software and Software only No computers Software only Software only computers computers Software only No computers

25 Respondents ratings of Office Star bundles Respondents' Ratings Respondents' ratings for each bundle (use consistent scale, e.g., between 0 and 100) Respondents / Ratings Bundle 1 Bundle 2 Bundle 3 Bundle 4 Bundle 5 Bundle 6 Bundle 7 Bundle 8 Respondent Respondent Respondent Respondent Respondent Respondents / Ratings Respondent 1 Respondent 2 Respondent 3 Respondent 4 Respondent 5 Bundle 9 Bundle 10 Bundle 11 Bundle 12 Bundle 13 Bundle 14 Bundle 15 Bundle

26 Estimating part-worths

27 Respondents part-worths for Office Star data Respondents' Preference Partworths Respondents' preference partworths. The most preferred profiles sum up to 100, the least preferred to 0. Respondents / Attributes and Levels Less than 2 Within 2-5 Within 5-10 Very large Large Limited Assortment Office Furniture No Furniture No computers Software only Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Respondent Software and computers

28 Summary statistics for preference partworths

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31 Uses of conjoint analysis Market segmentation Q: How would you segment the market using individual-level conjoint analysis output? New product design Q: How can conjoint analysis be used for new product design? Trade-off analysis (esp. in pricing decisions) Q: How much could the price of a Dell computer with 160 GB of hard drive space and 2 GB of RAM, which currently sells for $1,200, be raised if the screen size were increased from 12.1 in to 15.4 in? Competitive analysis Q: How can conjoint analysis be used to simulate market shares?

32 Market share simulations

33 Choice rules for simulations First-choice rule: the option with the highest utility is chosen; Share of preference rule: the choice probability is equal to the utility of an option relative to the total utility of all options in the choice set; Alpha rule: a weighted combination of the first two rules which maximizes the correspondence with market shares; Logit choice rule: similar to the share of preference rule, but the choice probabilities are computed as in the logit model;

34 Market share simulations: Existing product profiles Existing Product Profiles Labels and attribute levels for each existing product profile that already exists in the market. Attributes / Existing Product Profiles Office Equipment Department Store Location Within 2-5 Within 2-5 Office supplies Large Limited Furniture Office furniture No furniture Computers Software and computers Software only

35 Market share simulations with optimal product profiles Market Share Simulations Market share predictions for different scenarios, using the Logit Rule. Scenario / Product profiles Office Equipment Department Store Market Share of Optimal Product Profile Predicted market shares 73% 27% n/a...with Optimal Product 1 34% 13% 53%...with Optimal Product 2 36% 14% 50%...with Optimal Product 3 39% 14% 47%...with Optimal Product 4 40% 15% 45%...with Optimal Product 5 41% 15% 43%

36 Optimal product profiles Optimal Product Profiles Labels and attribute levels for each optimal product profile that the software recommends you introduce in this market Attributes / Optimal Product Profiles Location Office supplies Optimal Product 1 Less than 2 Very large Optimal Product 2 Less than 2 Large Optimal Product 3 Less than 2 Very large Optimal Product 4 Within 2-5 Very large Optimal Product 5 Less than 2 Large Furniture Office furniture Office furniture No furniture Office furniture No furniture Computers Software and computers Software and computers Software and computers Software and computers Software and computers