Ch7B Conjoint Analysis 2006

Design of New Products
Through Conjoint Analysis
 Role of design in
new product
development
 Conjoint Analysis
for product
(offering) design
Value of Good Design
80% of a product’s manufacturing costs are

incurred during the first 20% of its design
(varies with product category).
Source: Mckinsey & Company Report
Conjoint Analysis is a systematic approach

for matching product design with the needs
and wants of customers, especially in the
early stages of the New Product
Development process.
ME Conjoint Analysis 2006 - 2

Impact of Product Superiority on
Product Success
Mkt Share
53.5%
Success rate (%)
100
Mkt Share 98
32.4%
50 Mkt Share 58
11.6%
18.4
0
Minimal Moderate Maximal
Product Superiority
Based on a study of 203 products in B2B -- Robert G. Cooper, Winning at New Products (1993) .
Success measured using four factors: (1) whether it met or exceeded management’s criteria for
success, (2) the profitability level (1-10 scale), (3) market share at the end of three years, and (4)
whether it met company sales and profit objectives (1-10 scale).

Impact of Early Product Definition on
Product Success
Mkt Share
Success rate (%)
37.3%
100
Mkt Share
36.5 85.4
Mkt Share
50 22.9 64.2
26.2
0
Poor Moderate Strong
Product Definition
Source: Robert G. Cooper, Winning at New Products (1993)

Impact of Market Attractiveness on
Product Success
Success rate (%)
100 Mkt Share

Mkt Share
Mkt Share 36.5%
33.7
31.7
50 73.9
61.5
42.5
0
Low Moderate High
Market Attractiveness
Source: Robert G. Cooper, Winning at New Products (1993)

Resources Allocated at Each Stage of NPD
600 553.2
Mean Expenditure
500 ($000K) 435.9
400 Mean Pers on-Days

315.3
300
203.8
200 148.4
100 57
0
Predevelopment Product development Commercialization
Activities & product testing
Source: Robert G. Cooper (1993)

What Does Conjoint Analysis Do?
(Measure Importance by Assessing Preferences)
The basic outputs of conjoint analysis are:

 A numerical assessment of the relative importance
that customers attach to attributes of a product
category
 The value (utility) provided to customers by each
potential feature of an offering
 Identification of product designs that maximize
market share or other indices.

Why is Customer Value Assessment
through Conjoint Useful?
 Design new offerings that enhance customer value.

 Forecast sales/market share/profit of alternative
offerings.
 Identify market segments for which a given
concept/offering has high value.
 Identify the “best” concept/offering for a target
segment.
 Explore impact of alternative pricing and service
strategies.
 Plan production in flexible manufacturing systems.

Conjoint Analysis in Product Design
Should we offer our business travelers more room space or a

fax machine in their room?
Given a target cost for a product, should we enhance product

reliability or its performance?
Should we use a steel or aluminum casing to increase

customer preference for the new equipment?

Measuring Importance of Attributes
When choosing a restaurant, how important is…

Circle one
Not Very
Important Important
Decor 1 2 3 4 5 6 7 8 9
Location 1 2 3 4 5 6 7 8 9
Quality of food 1 2 3 4 5 6 7 8 9
Price 1 2 3 4 5 6 7 8 9

Measuring Importance of
Attributes
Average Importance Ratings
Décor 5.7
Location 6.5
Quality of Food 7.1
Price 6.2
1 5 9

Measuring Importance
By Measuring Utility
 For single-attribute products, an underlying preference or

utility scale can be constructed as follows:
 If a customer tells you she prefers Blue to Red, Red to Yellow, and
Blue to Yellow (transitivity), then you can create an underlying
numeric scale with the following “utiles” to represent customer
preferences for the three colors: assign 3 to Blue, 2 to Red, and 1 to
Yellow; or you could assign 10 to Blue, 9.95 to Red, and 1 to
Yellow. From this can we say whether this customer would prefer
Orange to Red?
Note: Preferences represent a higher-order construct than
Utility, i.e., utility comes from preferences.
 How do we come up with an underlying scale to represent
customer preferences for multi-attributed products?

Conjoint Study Process
Stage 1 —Designing the conjoint study:

Step 1.1: Select attributes relevant to the product or
service category,
Step 1.2: Select levels for each attribute, and
Step 1.3: Develop the product bundles to be evaluated.
Stage 2 —Obtaining data from a sample of

respondents:
Step 2.1: Design a data-collection procedure, and
Step 2.2: Select a computation method for obtaining part-
worth functions.
Stage 3 —Evaluating product design options:

Step 3.1: Segment customers based on their part-worth
functions,
Step 3.2: Design market simulations, and
Step 3.3: Select choice rule.
Simple Example of
Conjoint Analysis
Product Cuisine Distance Price Range Preference

Option Rank Value
1 Italian Near $10
2 Italian Near $15
3 Italian Far $10
4 Italian Far $15
5 Thai Near $10
6 Thai Near $15
7 Thai Far $10
8 Thai Far $15

Simple Example of
Conjoint Analysis
Product Cuisine Distance Price Range Preference

Option Rank Value
1 Italian Near $10 8
2 Italian Near $15 6
3 Italian Far $10 4
4 Italian Far $15 2
5 Thai Near $10 7
6 Thai Near $15 5
7 Thai Far $10 3
8 Thai Far $15 1

How to Use in Design/Tradeoff
Evaluation
 Example: Italian vs Thai = 20 – 16 = 4 util units

$10 vs $15 = 22 – 14 = 8 util units
 So “hai”is worth $2.50 more than “Italian” for this

customer:
4
(   (15  10)  $2.50)
8
Can use to obtain value to customer of

service (non-price) attributes.

Conjoint Study Process
Stage 1—Designing the conjoint study:

Step 1.1: Select attributes relevant to the product or
service category,
Step 1.2: Select levels for each attribute, and
Step 1.3: Develop the “product” bundles to be evaluated.
Stage 2—Obtaining data from a sample of respondents:

Step 2.1: Design a data-collection procedure, and
Step 2.2: Select a computation method for obtaining
part-worth functions.
Stage 3—Evaluating product design options:

Step 3.1: Segment customers based on their part-worth
functions,
Step 3.2: Design market simulations, and
Step 3.3: Select choice rule.
(Stage 3) Goals of Conjoint Simulation
 Generate directional guidelines

 Identify priorities
 Gain anticipatory intelligence
 Generate buy-in for action
 Improve communication within the
organization

Other Aspects to Consider
 Find optimal products by segment

 Cluster part-worth data and select segments for Conjoint
Analysis
 Adjust simulation to reflect reality (adjust for
awareness and availability of product)
 Revenue/profit potential of a new product
 Market share  Incremental margin over base product
 Assess cannibalization potential of new product
(Do before-after analysis)
 Exclude new product(s) before doing analysis
 Do analysis with new product(s) included

Frozen Pizza Example
Designing a Frozen Pizza
Attributes
 Type of crust (3 types)  Topping (4 varieties)
 Type of cheese (3 types)  Amount of cheese (2 levels)
 Price (3 levels)
Crust Topping Type of cheese

Pan Pineapple Romano
Thin Veggie Mixed cheese
Thick Sausage Mozzeralla
Pepperoni
Amount of cheese Price

2 Oz. $9.99 Note: The example in the book also
6 Oz. $8.99 has a 4 oz option for amount of
$7.99 cheese.
A total of 216 (3x4x3x2x3) different pizzas can be developed from these options!
Example Ratings Data

Example Part Worth Computation

Example Part Worth Computation

Conjoint Utility Computations
kj m
U(P) = aijxij
j=1 i=1
P: A particular product/concept of interest

U(P): The utility associated with product P
aij: Utility associated with the jth level (j = 1, 2,
3...kj) on the ith attribute
kj: Number of levels of attribute i
m: Number of attributes
xij: 1 if the jth level of the ith attribute is present
in product P, 0 otherwise ME Conjoint Analysis 2006 - 25
Utility Computation
(Designing a Frozen Pizza)
Customer’s Utility
Cust 1 Cust 2 Cust 3
Base* 0 45 30
Thin crust 10 -5 0
Thick crust 15 10 0
Veggie 10 0 50
Sausage 25 5 0
Pepperoni 30 20 0
Mixed Cheese 3 -10 0
Mozzarella 10 10 -5
6 oz 10 15 -20
$ 8.99 20 -10 10
$ 7.99 35 -5 20
*Base product is: Pan pizza with pineapple, 2 oz of Romano cheese, and
priced at $9.99.

Market Share and Revenue Share
Forecasts
 Define the competitive set – this is the set of products from

which customers in the target segment make their choices.
Some of them may be existing products and, others concepts
being evaluated. We denote this set of products as P1, P2,...PN.
 Select Choice rule
 Maximum utility rule
 Share of preference rule
 Logit choice rule
 Alpha rule
 Software also has a “Revenue index option” wherein you can
compute the revenue index of any product compared to the
revenue index of 100 for a base product you select.

Maximum Utility Rule (Example)
Under this choice rule, each customer selects the product that
offers him/her the highest utility among the competing
alternatives. Market share for product Pi is then given by:
K Consumers who prefer i the most

MS ( Pi )  
k 1 K
K is the number of consumers who participated in the
study.

Other Choice Rules
Share of utility rule: Under this choice rule, the consumer

selects each product with a probability that is proportional to
the utility of that compared to the total utility derived from
all the products in the choice set.
Logit choice rule: This is similar to the share of utility rule,
except that it gives larger weights to more preferred
alternatives and smaller weights to less preferred
alternatives.
Alpha rule: Modified version of share of utility rule. Before
applying the share of utility, the utility functions are modified
by an “alpha” factor so that the computed market shares of
existing products are as close as possible to their actual
market shares.

Market Share Computation
 Consider a market with three customers and three products:
Aloha Special Meat-Lover’s Treat Veggie Delite

Crust Pan Thick Thin
Topping Pineapple Pepperoni Veggie
Type of Cheese Mozzarella Mixed Cheese Romano
Amount of Cheese 6 oz 6 oz 2 oz
Price $8.99 $9.99 $7.99

Utility (Value) of each product for each customer.
Aloha Special Meat-Lover’s Treat Veggie DeLite

Customer 1 40 58 55
Customer 2 45 50 35
Customer 3 30 10 100
Maximum Utility Rule: If we assume customers will only buy the product with
the highest utility, the market share for Meat Lover’s treat is 2/3 and for Veggie
Delite is 1/3.
Share of preference rule: If we assume that each customer will buy each product
in proportion to its utility relative to the other products, then market shares for
the three products are: Aloha Special (27.4%), Meat Lover’s Treat (27.8%) and
Veggie Delite (44.8%).

Identifying Segments Based on
Conjoint Part Worths

Product Design for Specific Segments
 Design optimal product by segment

 Segment 1 (Value segment – 52% of the market): A
thick-crust pizza with 6 Oz mixed cheese and
pineapple (or sausage) topping priced at $7.99. This
will get about 32% share and revenue index of
around 100 (the same as the base product).
 Segment 3 (Premium segment -- 27.5% of the
market): A pan pizza with 2 Oz of Romano cheese
and pepperoni or sausage topping priced at $9.99.
This will get 31% share of this segment and have
revenue index of about 100.

Air Pollution Control System Example
Dürr Environmental is developing a new air pollution control

system (thermal oxidizer) to compete against existing offerings
from Waste Watch, Thermatrix, and Advanced Air.
Key offering attributes:

Thermal efficiency
Delivery time
List price
Delivery terms
Q: What to offer?
Who will buy/who to target?
Where will share come from?

Air Pollution Equipment Example
An Example Conjoint Study:
Air Pollution Control Equipment
Attributes
 Performance specs (4 options)  Price (4 options)
 Delivery time (4 options)  Delivery_terms (4 options)
Efficiency Delivery time List Price

Exceed by 9% 6 months $600k
Exceed by 5% 9 months $700k
Meets target 12 months $800k
Short by 5% 15 months $900k
Delivery terms
Installed, 2-year guarantee
Installed, 1-year guarantee
Installed, service contract
FOB seller, service contract
A total of 256 (4x4x4x4) different offerings can be designed from these

options!
Data for Conjoint Analysis:
Paired Comparisons
Deluxe Mid-level
model model
Efficiency Exceed by 9% Exceed by 5%

Delivery time 12 months 6 months
List Price 700k 700k
Delivery terms Installed, 1 year Installed, service contract
Which do you prefer?

Which one would you buy?

Data for Conjoint Analysis:
Full-Profile Ratings or Ranks
Product Efficiency Delivery Price Delivery Preference

Bundle Time Terms Score
1 Exceed_9% 6_months $600k Inst_2Yr 100
2 Exceed_9% 9_months $700k Inst_Ser 80
3 Exceed_9% 12_months $800k FOB_Ser 40
6 Exceed_5% 9_months $600k FOB_Ser 75
7 Exceed_5% 12_months $900k Inst_Ser 65
9 Meet_target 6_months $700k Inst_Ser 50
10 Meet_target 9_months $900k Inst_2Yr 20
11 Meet_target 12_months $600k Inst_1Yr 40
12 Meet_target 15_months $700k FOB_Ser 30
13 Short_5% 6_months $900k FOB_Ser 5
14 Short_5% 9_months $800k Inst_1Yr 10
15 Short_5% 12_months $700k Inst_2Yr 10
16 Short_5% 15_months $600k Inst_Ser 0

Example Part Worth for Attributes

Example Part Worths for
Attribute Options

Conjoint Utility Computations
kj m
U(P) = aijxij
j=1 i=1
P: A particular product/concept of interest

U(P): The utility associated with product P
aij: Utility associated with the jth level (j = 1, 2,
3...kj) on the ith attribute
kj: Number of levels of attribute i
m: Number of attributes
xij: 1 if the jth level of the ith attribute is present
in product P, 0 otherwise
Market Share Computation:
(Air Pollution Control Equipment)
Customer’s Utility
Sunoco Mattel ICI
Base 0 0 0
Meets target 5 10 10
Exceed 5% 35 0 40
Exceed 9% 40 0 50
12 months 20 5 3
9 months 30 20 8
6 months 40 10 10
$800k 5 20 2
$700K 8 35 5
$600K 10 50 10
Inst_ser 6 5 10
Inst_1Yr 8 10 20
Inst_2Yr 10 20 30
Market Share and Revenue Share
Forecasts
 Define the competitive set – this is the set of products from

which customers in the target segment make their choices.
Some of them may be existing products and, others concepts
being evaluated. We denote this set of products as P1, P2,...PN.
 Select Choice rule
 Maximum utility rule
 Share of preference rule
 Logit choice rule
 Alpha rule
 Software also has a “Revenue index option” wherein you can
compute the revenue index of any product compared to the
revenue index of 100 for a base product you select.

Maximum Utility Rule (Example)
Under this choice rule, each customer selects the product that
offers him/her the highest utility among the competing
alternatives. Market share for product Pi is then given by:
K Consumers who prefer i the most

MS ( Pi )  
k 1 K
K is the number of consumers who participated in the
study.

Other Choice Rules
Share of utility rule: Under this choice rule, the consumer

selects each product with a probability that is proportional to
the utility of that compared to the total utility derived from
all the products in the choice set.
Logit choice rule: This is similar to the share of utility rule,
except that it gives larger weights to more preferred
alternatives and smaller weights to less preferred
alternatives.
Alpha rule: Modified version of share of utility rule. Before
applying the share of utility, the utility functions are modified
by an “alpha” factor so that the computed market shares of
existing products are as close as possible to their actual
market shares.

 Market consists of three products and three customers
Product
Waste
watch Thermatrix Advanced Air
Performance specs Exceed 5% Exceed 20% Meet Specs

Delivery time 9 months 9 months 6 months
List Price $800k $900k $700k
Delivery terms FOB_ser Inst_1Yr Inst_ser

Market Share Computation:
Computed Utility for Products
Waste
Watch Thermatrix Advanced Air
Sunoco 70 78 61
Mattel 40 30 75
ICI 50 78 40
 Maximum Utility Rule: If we assume customers will only buy the product
with the highest utility, the market share for Thermatrix is 2/3 and 1/3 for
Advanced Air.
 Share of preference rule: If we assume that each customer will buy each
product in proportion to its utility relative to the other products, then
market shares for the three products are:
Waste Watch: 30.3% Thermatrix: 34.8 Advanced Air: 34.9

Identifying Segments Based on
Conjoint Part Worths (Airpol.pwr)

Members in Each Segment
Segment 1. Companies in this Segment include

 Cummins Engineering, Illinois Tools, Mattel, Neste-
Resin, Ralston Purina, New World Technologies,
Baltimore Gas, Applied Coatings, Pharmasyn, and
Thermal Electric.
 These are smaller companies that operate in
industries without major pollution problems. They
want an equipment that meets EPA efficiency
target, medium delivery times, have high price
sensitivity, and require installation and warranty.


 ICI, Mobil, Maytag, Texaco, Union Carbide, Dow
Chemicals, Boise Cascade, and 3M.
 These are large chemical and paper companies that
have pollution issues to deal with. They want an
equipment that Exceeds EPA efficiency target, have
long delivery times (perhaps for installation in new
factories that they build), have moderate price
sensitivity, and do not require installation help or
warranty (FOB).


 Deere, Intel, Air Products, Sunoco, HP, Conagra,
Kimberly-Clark, Hershey, and Westinghouse
Electric.
 These are large companies that seem to operate in
industries with less severe pollution problems.
They want an equipment that Exceeds EPA
efficiency target, prefer quick/medium delivery,
have low price sensitivity, and moderately prefer
installation and warranty.

Situations Where Conjoint Analysis
Might Be Valuable
 The new offering involves important tradeoffs affecting design,

production, marketing, or other operational variables.
 The offering is realistically decomposable into a set of basic attributes.
 Consumer choices with respect to the offering and its market tends to be
high involvement.
 Factorial combinations of basic attribute levels are believable.
 Desirable new offerings alternatives can be synthesized from basic
alternatives.
 The alternatives can be realistically described, either verbally or
pictorially. (Otherwise, actual product formulations should be
considered).
 Perceptions of hypothetical combinations are reasonably homogeneous
across members of the target group.

Ch7B Conjoint Analysis 2006

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Design of New Products

Through Conjoint Analysis

80% of a product’s manufacturing costs are

Conjoint Analysis is a systematic approach

ME Conjoint Analysis 2006 - 2

ME Conjoint Analysis 2006 - 3

Source: Robert G. Cooper, Winning at New Products (1993)

ME Conjoint Analysis 2006 - 4

100 Mkt Share

Source: Robert G. Cooper, Winning at New Products (1993)

ME Conjoint Analysis 2006 - 5

400 Mean Pers on-Days

Source: Robert G. Cooper (1993)

ME Conjoint Analysis 2006 - 6

The basic outputs of conjoint analysis are:

ME Conjoint Analysis 2006 - 7

 Design new offerings that enhance customer value.

ME Conjoint Analysis 2006 - 8

Should we offer our business travelers more room space or a

Given a target cost for a product, should we enhance product

Should we use a steel or aluminum casing to increase

ME Conjoint Analysis 2006 - 9

When choosing a restaurant, how important is…

ME Conjoint Analysis 2006 - 10

Average Importance Ratings

Quality of Food 7.1

ME Conjoint Analysis 2006 - 11

 For single-attribute products, an underlying preference or

ME Conjoint Analysis 2006 - 12

Stage 1 —Designing the conjoint study:

Stage 2 —Obtaining data from a sample of

Stage 3 —Evaluating product design options:

Product Cuisine Distance Price Range Preference

ME Conjoint Analysis 2006 - 14

Product Cuisine Distance Price Range Preference

ME Conjoint Analysis 2006 - 15

 Example: Italian vs Thai = 20 – 16 = 4 util units

 So “hai”is worth $2.50 more than “Italian” for this

Can use to obtain value to customer of

ME Conjoint Analysis 2006 - 16

Stage 1—Designing the conjoint study:

Stage 2—Obtaining data from a sample of respondents:

Stage 3—Evaluating product design options:

 Generate directional guidelines

ME Conjoint Analysis 2006 - 18

 Find optimal products by segment

ME Conjoint Analysis 2006 - 19

Crust Topping Type of cheese

Amount of cheese Price

ME Conjoint Analysis 2006 - 22

ME Conjoint Analysis 2006 - 23

ME Conjoint Analysis 2006 - 24

P: A particular product/concept of interest

kj: Number of levels of attribute i

ME Conjoint Analysis 2006 - 26

 Define the competitive set – this is the set of products from

ME Conjoint Analysis 2006 - 27

K Consumers who prefer i the most

ME Conjoint Analysis 2006 - 28

Share of utility rule: Under this choice rule, the consumer

ME Conjoint Analysis 2006 - 29

 Consider a market with three customers and three products:

Aloha Special Meat-Lover’s Treat Veggie Delite

ME Conjoint Analysis 2006 - 30