BM05MM MARKTING STRATEGY RESEARCH

SESSION 4
How to discover consumer
preferences?

Dr. Xi Chen
18 Nov. 2014
From last lecture: dummy coding

nominal/ordinal variable: quite similar to

scale/interval variables

coding is important!
m-1 dummy variables for a nominal variable with
m levels

interpretation is tricky!
always relative to the baseline level
From last lecture: moderation

a variable Z influences the nature and strength of

the relationship between X and Y

interaction between Z & X is the most important

parameter to interpret
From last lecture: mediation

X needs to affect Y (significant relationship between

1 two variables)

X needs to affect M (significant relationship between

2 two variables)

significant effect of X on Y becomes substantially smaller

3 (partial mediation) or disappears (full mediation) when
we control for the effect of M

X Y
 From last lecture: mediation

1 = + +
must be significant

2 = + +
must be significant

3 = + + + must be insignificant or
less in magnitude

M

X Y
X
Y
 Todays Agenda

Conjoint Analysis
1 hour 45 mins
what, why and how

Coffee Break
15 mins

SPSS Illustration
40 mins
A MOTIVATING EXAMPLE
Considering yourself purchasing a laptop
 Tradeoff between options

Option A Option B
3.5 GHz Processor 2.5 GHz Processor
2 GB RAM 4 GB RAM
 A product is a combination of attributes

attribute #1 processor speed

levels 1.5GHz
2GHz
3GHz
attribute #2 size of hard disk
levels 150GB
300GB
500GB
attribute #3 screen size
levels 12
15
attribute #4 weight
levels 2kg
3kg
attribute #5 price
levels 600
1000
1500
 A product is a combination of attributes

Profile 1 Profile 2

processor speed processor speed

levels 1.5GHz levels 3GHz
size of hard disk size of hard disk
levels 500GB levels 150GB
screen size screen size
levels 12 levels 15
weight weight
levels 2kg levels 3kg
price price
levels 1000 levels 1000
 As a product manager, how to decide which one to
offer?

Manager = Chef

Attributes = Ingredients

Conjoint Analysis = Recipe

CONJOINT ANALYSIS:
Why?
 Conflict of interests: consumers vs. firms

Firms want to maximize welfare by:

Consumers wants all of
the most desirable
features of a product at
lowest possible cost
1) minimizing costs of providing
features
2) providing products/services with
attributes combination leading
to higher consumer utility
Consumer side of equation

Focus first on demand/preference side of the

equation

After figuring out what consumers want, next

assess whether it can be produced/provided in a
cost-effective manner

Question: HOW?
Breaking down the problem

If we learn how consumer values different

attributes of a product, we are in a better position
to design those that improve profitability.

Intuitive way:
Ask about different attributes one-by-one
How much would you pay for ?
Rate the importance of brand: ____

Question: any problems with this approach?

Problems with disjoint approach

Answers often trivial and unenlightening

prefer low fees to high fees or large size to medium etc..

Importance ratings have low discrimination

Solution: considering jointly

Profile 1 Profile 2

processor speed processor speed

levels 1.5GHz levels 3GHz
size of hard disk size of hard disk
levels 500GB levels 150GB
screen size screen size
levels 12 levels 15
weight weight
levels 2kg levels 3kg
price price
levels 1000 levels 1000

Your ratings ____ Your ratings ____

 Logic of conjoint analysis

conjoint analysis constructs experiments where

consumers are asked to evaluate products by
considering different attributes jointly.

Conjoint Strategy
Analysis Insights

Attributes Products
CONJOINT ANALYSIS:
Some Terminologies
 Utility

Two attributes:
1 : speed of processor
2 : size of memory

: overall utility

= 1 1 + 2 2

Option A Option B
: part-worth or importance
3.5 GHz Processor 2.5 GHz Processor
2 GB RAM 4 GB RAM
 Revealed & stated preference

Revealed preference:
consumers are rational by
choosing an option with higher
utility

Stated preference:
consumer can take a good
guess of utilities offered by
Option A Option B options
3.5 GHz Processor 2.5 GHz Processor
2 GB RAM 4 GB RAM
CONJOINT ANALYSIS:
A CASE STUDY
Some background info

KPN was interested in determining trade-offs

among various attributes of a mobile phone

5 attributes of mobile phones

1. Style
2. Brand
3. Talk-time
4. Weight
5. Camera quality
Levels of attributes
Design of stimuli and questionnaires

Total no. of possible hypothetical products or

profiles:
4 4 4 4 4 = 1,028
Fractional factorial design: reduce no. of profiles to 32

Respondents:
Shown these 32 profiles
Asked to rate these profiles using 0-100 point scale
 Preference ratings from one respondent

IVs
DV
Dummy variable regression

Dummy coding
 Estimation of part-worth & importance

Utility contribution
of different levels

Relative importance
of attributes
Takeaways from the case

Recover consumers preference structure

Relative importance of different attributes

Which product profile is most preferred?

Predict market share of product profiles

If enough respondents, market segmentation

HOW TO PERFORM CONJOINT ANALYSIS
1 determining attributes & levels
 1 determining attributes & levels

Attributes are independent aspects of a product or

a service (brand, price, size, color)

How many attributes: not too many

Depends on research objectives
rule-of-thumb: no more than 6 or 7 attributes
too many: respondents simplify to 2-3 attributes

Each attribute has varying degrees, or levels

also not too many levels
rule-of-thumb: 3-5 levels for an attribute
 1 determining attributes & levels

Rules for determining attributes & levels

should have concrete/unambiguous meaning
attribute: quality? satisfaction?
level: very expensive vs. costs $575 or weight: 5-7
kilos vs. weight 6 kilos

Determine which attributes/levels to include:

qualitative method: focus group & in-depth interview
research objective: pricing, packaging
2 constructing profiles
 2 constructing profiles

Full profile approach with

all attributes included

Problem: too many profiles!

3 3 2 2 3 = 108

Stop torturing respondents!

 2 constructing profiles

Fractional factorial design

Special case: orthogonal design

Attribute 1 Attribute 2
1 1
1 2
1 3 Attribute 1 Attribute 2
2 1 1 3
2 2 2 2
2 3 3 1
3 1
3 2
3 3
 2 constructing profiles

Generating orthogonal design with SPSS

You can make stimuli via a fractional factorial
design
(SPSS > Data > Orthogonal Design > Generate)

Example: profession digital camera (3 attributes with 3

levels each)
1. information channel (brick & mortar, advisor, internet)
2. acquisition channel (brick & mortar, advisor, internet)
3. price (below, at, above recommended price)
design: stimuli
creating orthogonal design
creating orthogonal design
creating orthogonal design
 creating orthogonal design
construct other attributes and levels in a similar fashion
 creating orthogonal design
give a name to the dataset that will be generated
and let SPSS take care of the rest
 creating orthogonal design
9 profiles have been generated
each individual can rate each of these 9 profiles
 creating orthogonal design

Final note

The set of cards is not always the same. Even though the
set of cards is different, the estimation results will be
similar. So it doesnt matter which set of cards you use!
3 data analysis
3 data analysis
SUBJECT PROFILE ATT#1 ATT#2 ATT#3 RATING
1 1 3 3 1 5
1 2 1 2 3 7
1 3 3 1 3 4
1 4 1 3 2 6
1 5 2 3 3 2
1 6 3 2 2 6
1 7 2 2 1 6
1 8 2 1 2 2
1 9 1 1 1 5
2 1 3 3 1 3
2 2 1 2 3 6
2 3 3 1 3 4
2 4 1 3 2 7
2 5 2 3 3 10
2 6 3 2 2 orthogonal
9
2 7 2 2 1 4
2 8 2 1 2 design
4
2 9 1 1 1 10
3
3
1
2
3
1
3
2
1
3
generated
3
5
3 3 3 1 3 5
3 4 1 3 2 2
3 5 2 3 3 3
3 6 3 2 2 2
3 7 2 2 1 3
3 8 2 1 2 2
3 9 1 1 1 6
4 1 3 3 1 5

3 data analysis
SUBJECT PROFILE ATT#1 ATT#2 ATT#3 RATING
1 1 3 3 1 5
1 2 1 2 3 7
1 3 3 1 3 4
1 4 1 3 2 6
1 5 2 3 3 2
1 6 3 2 2 6
1 7 2 2 1 6
1 8 2 1 2 2
1 9 1 1 1 5
2 1 3 3 1 3
2 2 1 2 3 6
2 3 3 1 3 4
2 4 1 3 2 7
2 5 2 3 3 10 one
2 6 3 2 2 9
2 7 2 2 1 subject
4
2 8 2 1 2 4
2
3
9
1
1
3
1
3
1
1
will rate all
10
3
3
3
2
3
1
3
2
1
3
3
9 profiles!
5
5
3 4 1 3 2 2
3 5 2 3 3 3
3 6 3 2 2 2
3 7 2 2 1 3
3 8 2 1 2 2
3 9 1 1 1 6
4 1 3 3 1 5

3 data analysis
SUBJECT PROFILE ATT#1 ATT#2 ATT#3 RATING
1 1 3 3 1 5
1 2 1 2 3 7
1 3 3 1 3 4
1 4 1 3 2 6
1 5 2 3 3 2
1 6 3 2 2 6
1 7 2 2 1 6
1 8 2 1 2 2
1 9 1 1 1 5
2 1 3 3 1 3
2 2 1 2 3 6
2 3 3 1 3 4
2 4 1 3 2 total # obs
7
2 5 2 3 3 10
2 6 3 2 2 9 =
2 7 2 2 1 4
2 8 2 1 2 # subjects
4
2 9 1 1 1 10
3
3
1
2
3
1
3
2
1
3
3
5
x
3
3
3
4
3
1
1
3
3
2
# profiles
5
2
3 5 2 3 3 3
3 6 3 2 2 2
3 7 2 2 1 3
3 8 2 1 2 2
3 9 1 1 1 6
4 1 3 3 1 5

 3 data analysis

formula for basic conjoint analysis model

k: profile (k = 1,,K)
p: respondent (p = 1,,P)
i: attribute (i = 1,,M) : dummy if level j of
j: attribute level (j = 1,,Ji) attribute i is present in profile k

: overall utility/rating of
profile k by respondent p = +
=1 =1

: part-worth utility attached

to level j of attribute i
 Using dummy variable regression

Ji attribute levels must be coded using Ji-1

dummies!

= 0 + 11 11 + 12 12 + + 31 31 + 32 32
Level Dummy Coding
Attribute
Number Description 11 12 21 22 31 32
1 Personal Advisor 1 0
Information
2 Internet 0 1
Channel
3 Brick & Mortar 0 0
1 Personal Advisor 1 0
Acquisition
2 Internet 0 1
Channel
3 Brick & Mortar 0 0
1 Below Recomed 1 0
Price 2 Recomed 0 1
3 Above Recomed 0 0
Regression coefficient estimates

Variable Parameter Estimate

(Constant) 0 4.222
Information: Personal Advisor 11 1.000
Information: Internet 12 -.333
Information: Brick & Mortar 13 .000
Acquisition: Personal Advisor 21 1.000
Acquisition: Internet 22 .667
Acquisition: Brick & Mortar 23 .000
Price: Low 31 2.333
Price: Recommended 32 1.333
Price: Above 33 .000
4 making use of results
 4 making use of results

Most preferred product

Variable Part-worth
(Constant) 4.222
Information: Personal Advisor 1.000
Information: Internet -.333
Information: Brick & Mortar .000
Acquisition: Personal Advisor 1.000 Most preferred
Acquisition: Internet .667
Acquisition: Brick & Mortar .000
Price: Low 2.333
Price: Recommended 1.333
Price: Above .000
 4 making use of results

Importance of
attributes Importance of an attribute is defined as the
range of part-worth across the its levels
Variable Part-worth
(Constant) 4.222 = ( )
Information: Personal Advisor 1.000
Information: Internet -.333
Information: Brick & Mortar .000
Information = 1 .333 = 1.333
Acquisition: Personal Advisor 1.000
Acquisition: Internet .667
Acquisition = 1 0 = 1
Acquisition: Brick & Mortar .000 Price = 2.333 0 = 2.333
Price: Low 2.333
Price: Recommended 1.333
Price: Above .000
 4 making use of results

Importance of attributes
Variable Part- Importance
worth normalized by sum of importance of all
Information: 1.000 attributes

Personal Advisor
= , = 1
=1
Information: Internet -.333 1.333
=1
Information: .000
Brick & Mortar
1.333
Acquisition: 1.000 Information = = .286
Personal Advisor 1.333 + 1 + 2.333
Acquisition: Internet .667 1.000 1
Acquistion = = .214
Acquisition: .000 1.333 + 1 + 2.333
Brick & Mortar 2.333
Price = = .500
Price: Low 2.333 1.333 + 1 + 2.333
Price: Recommended 1.333 2.333
Price: Above .000
 4 making use of results

Calculate utilities of hypothetical products

Variable Part-worth Product A:

(Constant) 4.222 1 + .667 + 0 = 1.667
Information: Personal Advisor 1.000
Product B:
Information: Internet -.333 0 + 1 + 2.333 = 3.333
Information: Brick & Mortar .000
Acquisition: Personal Advisor 1.000 Market Share A:
1.667
Acquisition: Internet .667 = 33.3%
1.667 + 3.333
Acquisition: Brick & Mortar .000
Price: Low 2.333 Market Share B:
Price: Recommended 1.333 3.333
= 66.7%
Price: Above .000 1.667 + 3.333
SPSS ILLUSTRATION
1 determining attributes & levels

information sources
1. through the internet (companys website)
2. from an expert / advisor (in home)
3. in brick & mortar stores

purchase product
1. through the internet (companys website)
2. from an expert / advisor (in home)
3. in brick & mortar stores

price
1. below recommended price
2. recommended price ( 3,000)
3. above recommended price
1 determining attributes & levels
2 constructing profiles

full profile approach >

27 possible combinations (3x3x3)

orthogonal design >

9 profiles/product/respondent

preference measure >

rating (0-100 scale)

respondent task >

rate 9 profiles
2 constructing profiles

Imagine that you use the internet to

gather information on a professional
digital cameral and you purchase it in
Media Markt. The recommended price
is 3,000. In the store, you pay this
recommended price 10%.

How do you rate this scenario?

0------------------------------------------100
conjointdata.sav

conjoint plan/orthogonal design

information = information channel
acquisition = acquisition channel
price = price level

ratings = dependent variables

3 data analysis
conjointdata.sav

a respondent features in
multiple rows because s/he
evaluates multiple stimuli,
and rates each stimulus

3 data analysis
 Coding Dummies

DV > rating
IVs > dummy variables
(for an attribute with K levels, you make K-1 dummies)

2 dummies for 3 information channels

+
2 dummies for 3 acquisition channels
+
2 dummies for 3 price levels
(follow the instructions in last weeks lecture)
3 data analysis
All 6 dummies are created!

3 data analysis
run a regression with the rating as DV (I am using fire blanket
ratings) and the 6 dummies as IVs

3 data analysis
model fit!

model
significant!

no effect of
information
channel!

3 data analysis
 4 making use of results

calculating importance of attributes

Variable Part-worth
= (2) (2)
Information: Personal Advisor .000 = 0 (9.957) = 9.957
Information: Internet .000
Information: Brick & Mortar .000 = (3) (3)
= 16.538 0 = 16.538
Acquisition: Personal Advisor -3.799
Acquisition: Internet -9.957 = 9.957/(9.957 + 16.538)
Acquisition: Brick & Mortar .000 = 37.58%
Price: Low 16.538
Price: Recommended 6.286 = 16.538/(9.957 + 16.538)
= 62.42%
Price: Above .000
Takeaways

1. Think carefully about relevant attributes (based on theory,

focus groups, etc.) and levels.

2. Make stimuli via a fractional factorial design (SPSS

>Data>Orthogonal Design>Generate)

3. Collect the data based on a sample of respondents

4. Run a regression analysis using dummy variables or

effects coded variables

5. Calculate part-worth and importance of attributes

6. Interpret the results: which levels are preferred? Which

attribute most important?
just the tip of the iceberg!
see
http://www.sawtoothsoftware.com/education/techpap.shtml

for more on conjoint!