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Conjoint Analysis [Compatibility Mode]

# Conjoint Analysis [Compatibility Mode]

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12/07/2010

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# Selecting a Technique

Univariate and Multivariate D t M lti i t Data Analysis.

Dependency Dependent (criterion) variables and i d d independent ( di t ) d t (predictor) variables are present Interdependency Variables are interrelated without designating some dependent and others independent

Dependency Techniques
Multiple regression. Conjoint analysis. Discriminant analysis.

Interdependency Techniques

Factor analysis Cluster analysis y Multidimensional Scaling (MDS)

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Products/Services are Composed of Features/Attributes

Conjoint Analysis

Credit Card:
Brand + Interest Rate + Annual Fee + Credit Limit

On-Line Brokerage:
Brand + Fee + Speed of Transaction + Reliability of Transaction + Research/Charting Options

Breaking the Problem Down

If we learn how buyers value the components of a product, we are in a better position to design those that improve profitability

What brand do you prefer? What Interest Rate would you like? What Annual Fee would you like? What Credit Limit would you like?

Answers often trivial and unenlightening (e.g. respondents prefer low fees to high fees, higher credit limits to low credit limits)

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How to Learn What Is Important?

Stated Importances
Importance Ratings often have low discrimination:
Average Importance Ratings
Brand

How important is it that you get the <<brand, interest rate, annual fee, credit limit>> that you i t t t lf dit li it th t want?

6.7 7.2 8.1 7.5 0 5 10

Interest Rate

Annual Fee

Credit Limit

Stated Importance
Answers often have low discrimination, with most answers falling in “very important” categories Answers sometimes useful for segmenting market, but still not as actionable as could be

Conjoint Analysis
The objective is to decompose a set of overall responses to designed stimuli so that the utility of each stimulus attribute can be inferred from the respondent's overall evaluations of the stimuli.

3

History
CONsidered JOINTly To Conjoin Backdoor DECOMPOSITIONAL approach to estimate preference Luce and Tukey (1964) Green and Rao (1971) – Full profile Richard Johnson (1971) – Paired comparison McFadden (1974) – Discrete choice Green and Wind (1975, HBR) – Full profile

Creating Conjoint Design
Green and Srinivasan (1978) – LINMAP Steve Herman (1982 / 83) Bretton BrettonClark Software Richard Johnson (1985) – Sawtooth Software (ACA)

Attribute Level Stimuli / Concept

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Self –explicated [Not conjoint] Full profile Paired comparison ACA CBC

Assumption: Utility = f ( product attributes ) Sounds funny!; f(.) is an linear additive form (heroic assumption!); No interactions between different attributes; Consumers are able to assign `scales' to their utilities. tiliti Method of Scaling: Metric: (preference) rating scales for each product attribute combination; Non-metric: a ranking scale for each combination.

Different Perspectives, Different Goals

Demand Side of Equation Typical market research role is to focus first on demand side of the equation After figuring out what buyers want, next assess whether it can be built/provided in a cost- effective manner

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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How Does Conjoint Analysis Work?
We vary the product features (independent variables) to build many (usually 12 or more) product concepts We ask respondents to rate/rank those p p product concepts p (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.)

What’s So Good about Conjoint? (cont)

When respondents are forced to make difficult tradeoffs, tradeoffs we learn what they truly value

First Step: Create Attribute List
Attributes assumed to be independent (Brand, Speed, Color, Price, etc.)

Rules for Formulating attribute Levels

Levels are assumed to be mutually exclusive Each attribute has varying degrees, or “levels”
Brand: Coke, Pepsi, Sprite Speed: 5 pages per minute, 10 pages per minute Color: Red, Blue, Green, Black

Attribute: Add-on features level 1: Sunroof level 2: GPS System level 3: Video Screen
If define levels in this way, you cannot determine the value of providing two or three of these features at the same time

Each level is assumed to be mutually exclusive of the others (a product has one and only one level of that attribute)

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Rules for Formulating Attribute Levels

Rules for Formulating Attribute Levels

Levels should have concrete/unambiguous meaning
“Very expensive vs “Costs \$575” Very expensive” vs. Costs \$575 “Weight: 5 to 7 kilos” vs. “Weight 6 kilos” One description leaves meaning up to individual interpretation, while the other does not

Don’t include too many levels for any one attribute
The usual number is about 3 to 5 levels per attribute The temptation (for example) is to include many many many, levels of price, so we can estimate people’s preferences for each But, you spread your precious observations across more parameters to be estimated, resulting in noisier (less precise) measurement of ALL price levels Better approach usually is to interpolate between fewer more precisely measured levels for “not asked about” prices in NPD

Rules for Formulating Attribute Levels
Whenever possible, try to balance the number of levels across attributes There is a well-known bias in conjoint analysis called the “Number of Levels Effect” Number Effect
Holding all else constant, attributes defined on more levels than others will be biased upwards in importance For example, price defined as (\$10, \$12, \$14, \$16, \$18, \$20) will receive higher relative importance than when defined as (\$10, \$15, \$20) even though the same range was measured The Number of Levels effect holds for quantitative (e.g. price, speed) and categorical (e.g. brand, color) attributes

Rules for Formulating Attribute Levels
Make sure levels from your attributes can combine freely with one another without resulting in utterly impossible combinations (very unlikely combinations are still okay)
Resist temptation to make attribute prohibitions (prohibiting levels from one attribute from occurring with levels from other attributes)! Respondents can imagine many possibilities (and evaluate them consistently) that the study commissioner doesn’t plan to/can’t offer. By avoiding prohibitions, we usually improve the estimates of the combinations that we will actually focus on. But, for advanced analysts, some prohibitions are OK, and even helpful

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Approach of Obtaining Scales:
1. two-at-a-time procedure: respondents are shown two attributes at a time, each attribute is of several levels. Example: b E l brand vs. tread life, d t d lif Sears 40K 50K 60K Goodyear Goodrich 2. multiple-factor procedure: respondents are shown a combination of the levels of all attributes. Example: Card 1 Brand: Sears Tread Life: 40K miles Price: \$50 Sidewall: Black

Each respondent is asked to reveal his preferences by assigning a utility level (or a rank) to each attribute combination.

18 Combinations for the estimation

Multiple-Factor Evaluation
Tire: Brand: Tread Life: Price: Sidewall: Sears, Goodyear, Goodrich; 40K, 50K, 60K miles; \$50, \$60 \$50 \$60, \$70; white, black.

Card No. 1 2 3 4 5 6 7 8 9 10

Brand Sears Sears Sears Goodyear Goodyear Goodyear Goodrich Goodrich Goodrich Sears Sears Sears Goodyear Goodyear Goodyear Goodrich Goodrich Goodrich

Tread Life 40K 50K 60K 40K 50K 60K 40K 50K 60K 40K 50K 60K 40K 50K 60K 40K 50K 60K

Price \$50 \$60 \$70 \$60 \$70 \$50 \$70 \$50 \$60 \$70 \$50 \$60 \$50 \$60 \$70 \$60 \$70 \$50

Sidewall White White Black Black White White White Black White Black White White White Black White White White Black

Total possible combinations: 3x3x3x2=54, but only 18 combinations are needed:

11 12 13 14 15 16 17 18

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Metric Method
Suppose a respondent gives a set of rating scores (18 numbers), 3.5, 5.4, …. , 8.7, …. , 5.6, 9.2. Run a linear regression with dummy variables:

α:
βgy: βgr: β50: β60: βp6: βp7: βbk:

Score = α + β gy GY + β gr GR + β 50 K 50 + β 60 K 60 + β p 6 P 60 + β p 7 P 70 + β bk BLK + ε
where GY, GR, K50, K60, P60, P70 and BLK are dummy variables and

the mean utility value (score) for the combination of the levels, Sears, 40K, \$50, and white wall; the mean difference between Goodyear and Sears; the mean difference between Goodrich and Sears; the mean difference between 50K and 40K; the mean difference between 60K and 40K; the mean difference between \$60 and \$50; the mean difference between \$70 and \$50; the mean difference between Black and White sidewall.

Part-Worth
the marginal utility contributed by a specific attribute level Suppose βgy = 0.8 and βgr = - 0.3 (estimated from the b th above regression). B normalizing βgr t be 0, i ) By li i to b 0 we have a plot of part-worths as: Goodrich Part-Worths 0 Sears 0.3 Goodyear 1.1
Part-Worths 1.2 1 U tility 0.8 08 0.6 0.4 0.2 0 Goodrich Sears Goodyear

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Example 1: suppose that John evaluates the 18 combinations and provide the following preference ratings;
Card No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Brand Sears Sears Sears Goodyear Goodyear Goodyear Goodrich Goodrich Goodrich Sears Sears Sears Goodyear Goodyear Goodyear Goodrich Goodrich Goodrich Tread Life 40K 50K 60K 40K 50K 60K 40K 50K 60K 40K 50K 60K 40K 50K 60K 40K 50K 60K Price \$50 \$60 \$70 \$60 \$70 \$50 \$70 \$50 \$60 \$70 \$50 \$60 \$50 \$60 \$70 \$60 \$70 \$50 Sidewall White White Black Black White White White Black White Black White White White Black White White White Black Pref ratings 6.5 7.1 4.5 5.1 4.9 9.8 2.1 21 8.0 8.8 4.0 7.5 7.8 6.0 9.0 6.9 5.8 5.5 9.4

Run a dummy variable regression with the following Input;
Ratings 6.5 7.1 4.5 5.1 4.9 9.8 2.1 21 8 8.8 4 7.5 7.8 6 9 6.9 5.8 5.5 9.4 GY 0 0 0 1 1 1 0 0 0 0 0 0 1 1 1 0 0 0 GR 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0 1 1 1 K50 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 K60 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 P60 0 1 0 1 0 0 0 0 1 0 0 1 0 1 0 1 0 0 P70 0 0 1 0 1 0 1 0 0 1 0 0 0 0 1 0 1 0 BLK 0 0 1 1 0 0 0 1 0 1 0 0 0 1 0 0 0 1

Model Summary Model 1 R .945a R Square .893 Adjusted R Square .818 Std. Error of the Estimate .8790

a. Predictors: (Constant), BLK, P70, K60, GR, P60, K50, GY
ANOVAb Model 1 Sum of Squares 64.284 7.726 72.009 df 7 10 17 Mean Square 9.183 .773 F 11.887 Sig. .000a

Validity of the Model
Internal examination: use these coefficients to recalculated the mean score of each combination. Plot the actual and the , p y estimated scores, respectively. Examine the discrepancy (such as rank-order). External examination: use these coefficients to estimate the remaining combinations that are not used in the estimation process. Examine the discrepancy.

Regression Residual Total

a. Predictors: (Constant), BLK, P70, K60, GR, P60, K50, GY b. b Dependent Variable: Ratings

Coefficientsa Unstandardized Coefficients B Std. Error 5.792 .567 .717 .507 .367 .507 2.083 .507 2.950 .507 -.600 .507 -3.217 .507 .108 .439 Standardized Coefficients Beta .169 .086 .491 .695 -.141 -.758 .026

Model 1

(Constant) GY GR K50 K60 P60 P70 BLK

t 10.208 1.412 .723 4.105 5.813 -1.182 -6.339 .247

Sig. .000 .188 .487 .002 .000 .264 .000 .810

a. Dependent Variable: Ratings

10

Rating Score = α + β BR BR + β BM BM + βWBWB + βWCWC

Example 2: Color TV set
Attributes: Brand: Sony, RCA, and Magnavox; Warranty: Package A: labor and parts for the first 9 months months, Package B: free exchange during the first 6 months, Package C: parts only for the first 18 months; Screen Size: 10, 13, and 19 inches; Remote Control: Yes or No.

+ β13 S13 + β19 S19 + β R R + ε
where BR, BM, WB, WC, S13, S19, and R are dummy variables and the valuation of the base model: a Sony TV set with warranty package A and 10 inch screen, but without a remote control; βBR: the mean difference between RCA and Sony TV sets; y ; βBM: the mean difference between Magnavox and Sony TV sets; βWB: the mean difference between warranty packages B and A; βWC: the mean difference between warranty packages C and A; β13: the mean difference between screen size 13 and 10 inches; β19: the mean difference between screen size 19 and 10 inches; βR: the mean difference between with a remote controller and without a controller.

α:

18 Combinations for estimation
Card No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Brand Sony Sony Sony RCA RCA RCA Magnavox Magnavox Magnavox Sony Sony Sony RCA RCA RCA Magnavox Magnavox Magnavox Warranty Package A Package B Package C Package A Package B Package C Package A Package B Package C Package A Package B Package C Package A Package B Package C Package A Package B Package C Screen 10 inch 13 inch 19 inch 13 inch 19 inch 10 inch 19 inch 10 inch 13 inch 19 inch 10 inch 13 inch 10 inch 13 inch 19 inch 13 inch 19 inch 10 inch Remote Yes Yes No No Yes Yes Yes No Yes No Yes Yes Yes No Yes Yes Yes No Rating 58 75 92 48 90 55 88 45 65 95 60 70 52 50 85 68 90 35 Card No. 19 20 21 Brand Sony RCA Magnavox Warranty Package A g Package A Package A Screen 10 inch 10 inch 10 inch Remote No No No Rating 50 38 38

3 Combinations for validation

11

Run a dummy variable regression with the first 18 observations,
Rating 58 75 92 48 90 55 88 45 65 95 60 70 52 50 85 68 90 35 BR 0 0 0 1 1 1 0 0 0 0 0 0 1 1 1 0 0 0 BM 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0 1 1 1 WB 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 WC 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 S13 0 1 0 1 0 0 0 0 1 0 0 1 0 1 0 1 0 0 S19 0 0 1 0 1 0 1 0 0 1 0 0 0 0 1 0 1 0 R 1 1 0 0 1 1 1 0 1 0 1 1 1 0 1 1 1 0

Model Summary Model 1 R R Square .984a .968 Adjusted R Square .945 Std. Error of the Estimate 4.387

a. Predictors: (Constant), R, S19, WC, BM, S13, WB, BR

ANOVAb Model 1 Sum of Squares 5762.000 192.500 5954.500 df 7 10 17 Mean Square 823.143 19.250 F 42.761 Sig. .000a

Regression Residual Total

a. Predictors: (Constant), R, S19, WC, BM, S13, WB, BR b. Dependent Variable: Ratings
Coefficientsa Unstandardized Coefficients B Std. Error 51.333 3.102 -11.667 2.533 -9.833 2.533 .167 2.533 -1.167 2.533 11.833 2.533 39.167 2.533 10.500 2.194 Standardized Coefficients Beta -.302 -.255 .004 -.030 .307 1.015 .272

Model 1

(Constant) BR BM WB WC S13 S19 R

t 16.546 -4.606 -3.882 .066 -.461 4.671 15.462 4.786

Sig. .000 .001 .003 .949 .655 .001 .000 .001

a. Dependent Variable: Ratings

Using the estimated coefficients, we predict the preference ratings,
Rating Coefficients BR -11.667 BM -9.8333 WB 0.16667 WC -1.1667 S13 11.8333 S19 39.1667 R 10.5 (intercept) 51.33333 Pred. Rating

58 75 92 48 90 55 88 45 65 95 60 70 52 50 85 68 90 35 Validation 50 38 38

0 0 0 1 1 1 0 0 0 0 0 0 1 1 1 0 0 0

0 0 0 0 0 0 1 1 1 0 0 0 0 0 0 1 1 1

0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0

0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1

0 1 0 1 0 0 0 0 1 0 0 1 0 1 0 1 0 0

0 0 1 0 1 0 1 0 0 1 0 0 0 0 1 0 1 0

1 1 0 0 1 1 1 0 1 0 1 1 1 0 1 1 1 0

61.83 73.83 89.33 51.50 89.50 49.00 91.17 41.67 62.67 62 67 90.50 62.00 72.50 50.17 51.67 88.17 63.83 91.33 40.33

Observed vs. Predicted Ratings
100 90 80 Rating 70 60 50 40 30 1 3 5 7 9 11 13 15 17 Observations Predicted Rating Rating

0 1 0

0 0 1

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

51.33 39.67 41.50

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