Discovering Consumers' Ideal New

Product: Conjoint Analysis

With Excel
Industrial Landscape, Ashton-under-Lyne, by Laurence Stephen Lowry

Have you ever faced the situation where you have to decide which product
to buy among a multitude others? This is becoming increasingly
commonplace for the American consumer:
Do you pick a product formulated to freshen breath, control tartar, combat
plaque, or attack gingivitis? Do you select another if you’re older than 50,
have sensitive teeth, sensitive gums, or sensitive enamel? And that’s just
the tip of the iceberg. We know, because those are just some of the 27
varieties of Crest we recently bought at a single supermarket. (For Colgate,
we found a mere 25.)

The above explosion has serious consequences for business professionals -

especially for entrepreneurs. For example, in order to introduce a new
product, powerful retailers often require companies to pay slotting
allowances, which are fees paid solely to place the new product on the shelf.
Furthermore, a proliferation of new products in the shelf make choices
harder for consumers.

In the light of these challenges, savvy marketers must understand which

new products are most likely to survive in a retailer’s shelf, and what market
share to expect, before they are introduced. In other words, you must
determine what consumers' ideal new product is, and how well it will do
on the shelves, before introducing it!

Conjoint analysis is a useful tool to this end, and has helped firms of all sizes
design new products and services - most famously the Courtyard by
Marriott hotel chain. Specifically, using conjoint analysis, the entrepreneur
can (1) determine how preferred each product attribute is, (2) in
consequence, how preferred a potential new product will be, and (3) what is
the likely market share that will result from introducing a new product.

What's the advantage over entrepreneurs that do not use Conjoint

Analysis?

Market-oriented entrepreneurs will have advantages with their target

market and with investors if they use Conjoint Analysis:

Type of entrepreneur

Myopic
A myopic entrepreneur will
launch a new product with
insufficient information about
Market
consumer preferences. This is
advantage
likely to result in an
unsuccessful product
introduction.
This entrepreneur will come
to investor meetings without
understanding how much will
consumers like his or her
Investor product. This can generate
advantage suspicion and invite slotting
allowance charges, which
both diminish the
entrepreneur's potential of
securing investor funds.
What do entrepreneurs need to determine consumers' ideal product?
Market-oriented
A market-oriented entrepreneur
will first determine the ideal
product that consumers want,
based on solid analysis of their
preferences, and then introduce
it, minimizing risk of failure.
This entrepreneur will back up his
claims with real data on consumers'
preference for an ideal new
product. Also, the entrepreneur will
be able to predict the market
share resulting from the new
product introduction. This is likely
to give investors' more confidence
and potentially lower slotting
allowances.

A survey that records consumers' ratings for product profiles - that is,
 for different types of products, where different means has different
attributes. These ratings can be on a scale of 1 to 7, 1 to 9, or 1 to 10. For
example, one could determine 12 different product profiles, and ask
consumers to rate each of those profiles from 1 to 10.
Software packages, namely Microsoft Excel.

How can entrepreneurs determine consumers' ideal product?

To determine consumers' ideal product, the entrepreneur needs to go

through the four steps that constitute a conjoint study:

Preliminaries:
What's a "product", exactly?

To begin our discussion, it is useful to think of products as a "bundle of

attributes". Everything you buy as a consumer, and market as an
entrepreneur, can be understood in this way. You may never look at a box of
Frosted Flakes in the same way again!
Figure 1: What's in a box of Frosted Flakes?

In Figure 1, we have defined Frosted Flakes as a product with:

Three main attributes that consumers think about when buying a

product, service or idea.
Each attribute, in turn, has levels, that is, the various different
expressions of the attributes a product contains.
In the case of Frosted Flakes, the attribute levels that compose them
are sugary flavor, flake shape, and presence of marshmallows. This is
known as the product profile of Frosted Flakes.

Our assumption, when thinking about products as bundles of attributes, is

that every product possesses one level of each attribute. Therefore, any
product in the market could be summarized using a combination of these
attributes - a profile. Now, if we believe that flavor, shape, and marshmallows
are the main three attributes in the market for cereals, how many products
could we potentially design? By multiplying the number of levels in each
attribute, it can be seen that the number of potential product profiles is
3x2x2 = 12.

Why do we need Conjoint Analysis? Couldn't we simply ask people to tell

us how much they prefer each attribute in a certain product category, and
use those preferences to design new products? There are two potential
problems with this approach:

First, what consumers state may not necessarily reflect what they truly
prefer. This is a big issue when developing controversial or sensitive
products, or products that the consumer wants to use to signal a certain
status they may not want to admit. Thus, ideally, you should use a
method that allows you to recover consumers' preferences from their
actual, observed choices. These are called revealed preferences.
Second, even if consumers were willing to truthfully reveal their
preferences, sometimes these are hard to articulate. For example, you
may be able to articulate how much you prefer one car, or one house,
from another, and do so attribute by attribute, because these are high-
involvement products. But how about toothpaste? Detergent? Toilet
paper? In situations where the product you want to introduce is a low-
involvement product, obtaining accurate preference estimates is an
issue regardless of how truthful consumers are.

The need for obtaining revealed preferences, and the difficulty of articulating
them, calls for a statistical method that allows you to recover these revealed
preferences in a simple way. When you are thinking about developing a new
product, and you want the above, Conjoint Analysis is the way to go!
Step 1:
Discover consumers' "mind map"

The first step in the Conjoint Analysis study is to determine what attributes,
exactly, do consumers consider when purchasing within the product
category of interest. For example, when thinking about purchasing a new
laptop computer, do consumers think about their speed? Display quality?
Size? Weight? Hard drive size? These attributes are generally uncovered
through a series of focus groups. Furthermore, the relevant levels within
each attribute must be determined as well. For example, how many laptop
computer sizes do consumers generally consider? Note that, unlike a
perceptual map study, here we are not as interested in the mind map itself.
The crux is to obtain consumers' preferences for product attributes.

Some attributes may not be objective, but rather subjective. For example, a
2008 study by Luo, Kannan and Ratchford show how consumers perceive a
power drill along a series of objective attributes (such as shape, switch type,
and weight) as well as two subjective attributes (perceived power and
comfort). Their research shows that incorporating these subjective attributes
into product profiles may allow us to obtain more information on what the
ideal product for consumers is.

Step 2:
Develop
product profiles

After determining the relevant product attributes, and their corresponding

levels, a set of product profiles must be developed, and then coded into an
SPSS file, Excel spreadsheet, and so forth. You can see an example of
product profiles in a conjoint survey here. The objective is to develop profiles
that consumers will then rate according to their preference. The idea is
that by knowing how much they like a particular product profile, you can infer
how much they like each separate attribute level.

Recall that the number of levels for each attribute must be multiplied.
Consequently, when the number of attributes and/or levels is very large, you
may not be able to show all potential profiles to consumers. In that case, only
a smaller set of profiles may be shown. Designing these is outside of the
scope of the course, but interested students may wish to read on fractional
factorial experimental designs.

These profiles are developed with a technique called "dummy coding". With
dummy coding, we create a file with a number of columns equal to the
number of levels in our study. Each row represents a product profile, and
each column represents a particular attribute level. In each cell, the number
"1" denotes that a particular profile has that attribute level, and the number
"0" denotes the absence of that level.
No
Profile Sugar Chocolate Unflavored Flakes Nuggets Marshms.
Marshms.
1 1 0 0 1 0 0 1
2 1 0 0 0 1 0 1
3 0 1 0 1 0 1 0

Table 1: Three cereal profiles: Can you describe them?

For example, in Table 1, Profile 1 represents Frosted Flakes (i.e. a sugary

cereal, with flake shape, and no marshmallows); Profile 2 represents a
version of Frosted Flakes with nuggets instead of flakes; Profile 3 is a new
cereal that has chocolate flakes and marshmallows. IMPORTANT:
Remember that products can have NO MORE THAN ONE LEVEL per
attribute! In other words, a product can't both have and not have
marshmallows at the same time!

When you have determined which profiles consumers will evaluate, you must
copy the dummy-coded profiles into an Excel or SPSS file. After that, you
must remove one level for EACH ATTRIBUTE. Generally, the "worse"
attribute or an "absent" level is deleted. For example, this is how our Excel
file could look like:
 Profile RATING Sugar Chocolate Flakes Marshmallows
1 . 1 0 1 0
2 . 1 0 0 0
3 . 0 1 1 1

Table 2: Excel spreadsheet removing one level per attribute

In Table 2, we removed the following levels:

Unflavored was removed from the flavor attribute;

Nuggets was removed from the shape attribute;
No Marshmallows was removed from the marshmallows attribute.

The reason why we remove these will become clear in the next section. For
more information on coding, download my notes on data coding from my
Analytical Methods page. Finally, notice that there is a new column, called
RATING, which is left blank. For each consumer you survey, you will create
a spreadsheet like this, and copy their ratings for each profile there.

Step 3:
Discover consumers'
attribute preferences and
importances

Let's change gears, and assume that you're now interested in pricing a
detergent. The main attributes and levels of detergents in your study are:

Brand: Complete, Smile, and Wave.

Scent: Fresh, Lemon, and Unscented.
Softener: Yes/No.
Size: 32oz., 48oz., 64oz.
 Price: $2.99, $3.99, $4.99.

How many potential product profiles could be produced in this context?

You could potentially come up with 3x3x2x3x3 = 162 product profiles.

Clearly, no consumer would be willing to sit and rate all of those! Therefore,
we created a smaller set of 23 profiles using the experimental design
software SAS ADX:

Figure 3: Our Excel/SPSS sheet for the detergent Conjoint Study. Notice how
all ratings in this case are between 1 and 10. Can you describe each product
profile by looking only at the table?

These profiles are easy to read. For example:

Profile 1 (first): Complete brand/Fresh scent/No softener/48 oz./$4.99

Profile 23 (last): Complete brand/Lemon scent/With softener/48
oz./$3.99
With this information at hand, all that remains is to come up with a technique
that allows us to understand how each level of each attribute "contributes"
to form this particular consumer's overall rating. For example, it could be
that, among all attributes, only the Brand attribute matters, or perhaps only
the Complete brand level matters. A useful technique to this end is known as
Regression Analysis. Regression Analysis decomposes and separates the
effects that many independent variables have on a single dependent
variable. The analysis gives you the preference of this consumer for
each attribute level. These are sometimes called "part-worths", or simply
"preferences". Thus, you can think of the resulting preferences as levers or
buttons that, when pressed, make consumers' more or less happy. To run a
Regression Analysis, you can use either SPSS or Excel. Just make sure that:

1. Your rating variable is the dependent variable; and

2. All your dummies after removing one from each level are your
independent variables;

You can run Regression Analysis in Excel by installing the Data Analysis
toolpak (this works only for PC). In SPSS, you only need to go to Analyze ->
Regression -> Linear.

The relevant results from running Regression Analysis on the data shown in
Figure 3 is as follows:
Figure 4: Regression Analysis results for Detergent study. Data is for a single
consumer, in Figure 3.

What are the attribute LEVELS the consumer prefers more?

Let's think about what the numbers in the columns of Figure 4 mean:

- The first column just shows the names of each level. An additional level,
called Intercept, is added. The Intercept represents consumers' "base"
preference for all detergent products. Different levels of detergent attributes
will make this base go up or down.
- The second column, Coefficients, displays the consumer's preference for
each level.
- The last column, p-Value, holds a value between 0 and 1. Only levels whose
p-value is smaller than or equal to 0.05 truly make a difference for the
consumer.

Before continuing, it is important to understand how to interpret the

preference estimates. For example, what does Complete=-6.05 mean? What
does Price ($2.99)= 1.28 mean? For this, we need to return to our "dummy
coding" scheme. Recall that we deleted one attribute level per attribute. This
means that the resulting preference estimates reflect consumers' preference
as compared to the deleted attribute!. That's it! The deleted levels serve
as a baseline, or "benchmark", which is always 0. This is how the results look
graphically:
Figure 5: Interpretation of consumer preferences. For each level, interpret in
relation to the benchmark you defined when you constructed the dummy
set. Faces taken from the Wong-Baker FACES scale
(http://www.wongbakerfaces.org).

Which is the worst brand? Which is the most preferred price level?

As you can see, preferences are interpreted with respect to the benchmark,
valued at zero, regardless of which benchmark you defined! So, in this case,
Wave is the most preferred brand. Because we set it as benchmark, brands
worse than Wave have negative preferences, and brands better than Wave
would have positive preferences. In addition, it is important to note that the
distance between each level matters. For example, there is a huge
difference between Wave and other brands in this consumer's mind.
However, there is not so much difference between the Fresh, Lemon, and
Unscented scents. These distances reflect how strong the preferences are.

What are the MOST IMPORTANT ATTRIBUTES overall?

This idea of distance has a powerful implication. As you noticed from Figure
5, the distances between the brand levels are very large, but others, such as
the scent levels, are not. When consumers have stronger preferences for
certain attributes, in general, the distances within its levels will be larger.
With this idea in mind, we can calculate the importance of each attribute,
regardless of its levels.

To compute the importance of each attribute, do the following for each one
of them:

1. Find out what is the least preferred attribute level for the attribute.
2. Find out what is the most preferred attribute level for the attribute.
3. Subtract the maximum minus the minimum.

These importances represent how much the consumer prefers whole

attributes, in big "chunks". So, once you have computed each importance,
sum all of them. This would give you a number that represents, overall, how
happy this consumer would be with the product. Finally, divide each
importance by the sum. That would tell you the portion of consumers'
happiness that each attribute, as a whole, conveys. Figure 6 explains this
idea - warning, though: in Figure 6, the softener attribute was removed
because of its small importance! This is why softener is not included.
Figure 6: Calculating each attribute's importance - think of total importance
as a tape that measures how happy the product makes the consumer. Each
attribute occupies a different part of the tape. A larger part implies consumer
cares more about that attribute!

With this information in hand, you now know that, for this consumer, brand is
most important, followed by weight and price, and finally scent. Softener is
negligible. Furthermore, using your p-Values, you can also determine that
only the brands, as well as the 48 oz. weight and the $2.99 price point really
make a difference for this particular consumer.

Step 4:
Design ideal product and estimate market shares

Up to now, you know:

That products are composed of different attributes that, in turn, are

composed of different levels;
That we can discover consumers' preferences for those levels without
specifically asking for them;
That every time we discover consumer preferences for each attribute
level, they are always relative to a particular level, which we deleted
from our data;
That not every level may make a difference for the consumer -
specifically, those levels with a p-Value <.05.
That we can calculate how important for each consumer each attribute
 is, regardless of its levels, by using level preferences.

What's missing? The best part - let's design consumers' ideal

product! Recall that you now know this particular consumer's preferences
for every attribute level. In addition, you know the value of the "Intercept" - a
baseline preference that drops or rises, depending on which attribute levels
a certain product has.

How do we know which is the ideal product? We simply need to design a

bunch of them, and see which one makes this consumer happiest! For
example, suppose we need to figure out which, among these four
"candidate" products, would be most preferred:
Candidate Brand Scent Softener Size Price
1 Complete Lemon With softener 48oz. $4.99
2 Wave Unscented No softener 64oz. $2.99
3 Wave Unscented Softener 32oz. $4.99
4 Smile Fresh No softener 48oz. $3.99

Table 3: Five candidates for this consumer’s love: Which will come out on
top?

How would a myopic marketer, who **did not** conduct Conjoint

Analysis, would go about finding consumers' ideal product? How will
**you** do it using preference information?

Figuring out which product among these four is the consumers' ideal
product is very simple. You know consumers' baseline preference (Intercept)
and how consumers' baseline preference changes with each attribute level.
So, it's as simple as summing! For example, let's figure out how preferred
candidate 1 would be:

1. Start with the Intercept: A base preference of 6.12

2. Next, add the brand preference (Complete): 6.12 + (-6.05) = 0.07.
3. Next, add the scent preference(Lemon): 6.12 + (-6.05) + (-0.02) = 0.05
4. Next, add the softener preference (With softener): 6.12 + (-6.05) + (-0.02)
+ (-0.15) = -0.1
5. Next, add the size preference (48oz.) = 6.12 + (-6.05) + (-0.02) +(-0.15) +
1.28 = 1.18
6. Finally, add the price preference ($4.99) = 6.12 + (-6.05) + (-0.02) +
(-0.15) + 1.28 + 0 = 1.18

Be very careful!!: when we added the price preference $4.99 was

defined as our "benchmark" level for the Price attribute. Therefore, its
preference is set at 0, as we saw in Figure 5 when we interpreted
preferences.

As you can see, this is a very straightforward calculation. The end result?
This consumer's preference for candidate product 1 is 1.18. Of course,
without knowing how preferred the rest of the products are, this number
makes no sense. So, let us calculate the preference for all our candidates
and figure out which one is ideal:

Candidate Brand Scent Softener Size Price Preference

6.12 + (–6.05) + (–0.02)
With
1 Complete Lemon 48oz. $4.99 + (–0.15) + 1.28 + 0 =
softener
1.18
No
2 Wave Unscented 64oz. $2.99 6.12+0+0+0+0+1.28=
softener
6.12+0+0+(–
3 Wave Unscented Softener 32oz. $4.99
0.15)+0.75+0=6.72
No 6.12+(–5.92)+(–
4 Smile Fresh 48oz. $3.99
softener 0.67)+0+1.28+0.53=

Table 4: With preferences in hand, product candidate 2 wins!

If you had to choose from the above four designs to satisfy this consumer,
the obvious choice is to design and launch product candidate 2 as your new
product. As you can see, this is much, much better than trying to blindly
design a new product or deciding based on a couple of focus groups.

More striking is how much we gain from learning about ideal product design.
Although we used only 23 profiles to obtain preferences for attribute levels,
we could potentially determine how preferred each and every single
product among the 162 potential designs is for this one consumer
following the procedure shown in Table 4. After doing this, we find the
following distribution of preferences:

Preference # of designs % of designs Avg. preference

Negative 10 6.17% –0.3
Low (0–2.76) 98 60.49% 1.25
Medium (5.3–7.93) 45 27.78% 6.86
High (>7.93) 9 6.17% 8.29

Table 5: For this consumer, a couple products are terrible; most are
mediocre; less than 10 guarantee success.

As you can see, among the more than 100 potential product designs, less
than 10% of them would be most preferred by this person. This is why using
Conjoint Analysis to find consumers' ideal product is so helpful.

What do you think is the best design?

As it turns out the best design is a Wave detergent, unscented, with no

softener, weighing 48 oz., at a price of $2.99. This product has a
preference score of 8.68.

What if I want to learn about preferences for MORE than one consumer?

Naturally, examining preferences for only one consumer is not the best way
to design a product. However, so far, we have only addressed a single
consumer. To calculate preferences that may be more representative of the
market, you should do the following:

1. Apply the Conjoint survey to a group of consumers, say, 50;

2. Conduct Regression Analysis on each of the 50 consumers’ profile
ratings separately. This will give you 50 tables as the one shown in
Figure 4 (you can ignore the Intercept).
3. Average those coefficients. For example, we recorded detergent
ratings for 4 additional consumers. We separately analyzed each of the
5 ratings, obtaining the resulting table:

Subject Subject Subject Subject Subject

Coefficient Average
1 2 3 4 5
Complete –6.05 –0.11 –0.26 0.25 –0.28 -1.29
Smile –5.92 0.81 –0.08 0.52 0.64 –0.81
Fresh –0.67 –0.78 1.00 –0.52 –1.39 –0.47
Lemon –0.02 0.01 0.67 0.08 –4.29 –0.71
Softener –0.15 0.08 –1.98 –0.29 –0.11 –0.49
32oz. 0.75 –5.91 –1.08 –3.30 –0.98 –2.10
48oz. 1.28 –1.38 –0.26 –1.93 –1.17 –0.69
$2.99 1.28 3.79 2.07 4.66 2.77 2.91
$3.99 0.53 2.47 3.48 3.88 2.03 2.48

Table 6: Average preferences for every attribute level on a 5-subject

sample.

Note that the “Subject 1” column reflects the preferences we found earlier in
Figure 4. Also, recall that, for our first consumer, brand was the most
important (specifically, 65%, as shown in Figure 6). Does this hold when we
consider average preferences across several consumers? Judge for
yourself:
 Attribute Maximum Minimum Importance for 5 subjects
Brand 0 –1.29 1.29 (17.17%)
Scent 0 –0.71 –0.71 (9.46%)
Softener 0 –0.49 0.49 (6.52%)
Size 0 –2.10 2.10 (28.02%)
Price 2.91 0 2.91 (38.83%)

Table 7: Average importance for detergent attributes on a 5-subject sample.

Do the 5-subject sample importances look like the ones calculated for
our first subject?

As can be seen, a reasonably sized sample would be ideal for investigating

consumers’ ideal products. Make sure you conduct the Conjoint Analysis
study with at least 30 subjects.

How do we predict market share for the product we choose to launch?

To predict market shares, you must first determine the following. Among the
product designs you can evaluate based on consumer preferences, which
are most likely to be on the shelves alongside your newly launched product?
This constitutes the set of products consumers will compare to decide what
to buy - this is known as consumers’ consideration set.

Once you have determined consumers’ consideration set, you need to

conduct the following analysis for each consumer in the sample:

1. Obtain preference estimates.

2. Next, calculate how preferred each product in the consideration set
would be, according to those preferences.
3. The product with the maximum preference among all products in the
consideration set is the one you would expect the consumer to choose.
 This is known as the maximum utility rule: whatever is predicted to be
most preferred is assumed would be chosen by that subject. Other
rules, such as the logit rule, exist.

Once you determine what consumers’ would have most likely chosen, you
can simply compute the percentage of predicted choices for each product.
For example, if you survey 20 individuals, whose consideration set consists
of 6 products, and 7 individuals choose Design 1, then Design 1 would obtain
a market share of 7/20 = 35%. That’s it! You can practice using our class
dataset here.

References

Consumer Reports. 2014. The downside of too many product choices on

store shelves. Consumer Reports, January 2014. Accessed February 18,
2014 (Source).

Luo, Lan, Brian T. Ratchford, P.K. Kannan. 2009. Incorporating Subjective

Characteristics in Product Design and Evaluations. Journal of Marketing
Research 45(2), pp. 182–194.

Wind, Jerry, Paul E. Green, Douglas Shifflet and Marsha

Scarbrough. Courtyard by Marriott: Designing a Hotel Facility With
Consumer-Based Marketing Models. Interfaces 19(1), pp. 25–47.