Conjoint Analysis: What, Why, and How
Conjoint analysis is a technique used by various businesses to evaluate their products and services, and determine how consumers perceive them. Products are broken-down into distinguishable attributes or features, which are presented to consumers for ratings on a scale. The technique provides businesses with insightful information about how consumers make purchasing decisions.
In this article, we will look at 1) what is conjoint analysis, 2) how does it work, and 3) what are the benefits to using conjoint analysis.
WHAT IS CONJOINT ANALYSIS?
Conjoint analysis is one of the most popular tools used for market research purposes. It is an advanced exploratory technique used to determine how people make decisions and on what factors do they place real value in various products and services. It has been widely employed for product/services analysis purposes since 1970s. Alternatively, this technique is also used for discrete choice estimation.
The technique involves analysis of choices people make, and determination of reasons behind those choices. The tools does not only measure utility of decision made by consumers, but also helps managers answers questions such as, “What features should we add to our products, “What impact would changes have on sales and revenues”, “How will the intended changes give us an edge over competitors” and “What would be the impact of prices changes on sales”.
Consequently, the answers to these questions can be used to construct market models, enabling forecasting in different areas of business. The forecasting model could be invaluable help to organization as they would help them to plan ahead and allocate resources accordingly. The conjoint methodology decompositional approach helps evaluates consumer preference. Consumers are asked to give an overall rating or score to a particular product profile, which is created by putting in varying attributes for products and services under scrutiny.
When customers are about to make a purchase, they are faced with trade-offs in form of competing products and services. The product exhibited by the competitors may have varying attributes, which will lead the customer to make a choice based on those attributes. For example, will the consumers prefer high quality or low price, Product aesthetics or functionality? In order for businesses to better understand exactly how customers value various attributes of product and services, conjoint analysis is a helpful tool, since it provides insights into the market, which comprises of individual consumers. This technique helps businesses find the optimal balance between various attributes, the point where consumers’ value for products and services is the greatest. Conjoint analysis helps business decision makers determine and quantify the thought process consumers employ when they are faced with trade-offs between various products and services available in the market. This is done through quantification of different aspects or features of products or services. After the analysis is done, and consumer preferences are worked out, the business is well-equipped to determine the optimum point where consumer preference and cost to the company is balanced. At this point business will be able to generate maximum profit, which is the primary aim of any business.
Conjoint analysis is different from conventional marketing surveys since it does ask what products and services consumers prefer, but ask respondents to pinpoint features/attributes of particular products or services. In most cases, the respondents are asked to rank the attributes in reference to importance they attract to them. Hence, this approach offers a more realistic and insightful view of customers’ needs.
In summation, Conjoint analysis is market surveying technique in which respondents are required to make choice based on trade-offs between various attributes/features of product of services. This is usually done by assigning rating on a scale with upper and lower limits names as ‘Most Preferred’ and ‘Least Preferred.’
HOW DOES IT WORK?
Conjoint analysis is done under the assumption that a product or service can be broken down into various attributes. For example, a laptop has attributes such as color, price, dimensions, processing power, hard disk space, RAM and shape. Conjoint Analysis aims to find the value consumer place on each of these attributes before they make a decision to purchase the laptop. Consequently, total utility received from all attributes of a product or service is equal to the sum of utilities derived from each attribute.
Conjoint analysis can be divided into three distinct phases:
- Data. Collection of data pertaining to trade-offs on various attributes. This information can be collected by conducting a preliminary survey, which will help the business identify how the product is broken down in consumers’ mind. All the information collected at this stage is represented in form a questionnaire after thorough analysis and deliberations.
- Analysis. Once the questionnaires are filled, and the information from consumers is collected, statistical analysis of the data takes place, which is a process through which, businesses derive meaning out of the results. Graphs, charts and other tools could be used at this point to compressively represent the information that has been collected, along with its meaning and interpretation. Effective representation of all the collected results is important since managers need to fully understand and comprehend the results.
- Action. The third phase calls for action, since now managers are expected to use the results of conjoint analysis and help business stimulate demands for their products and services. For example, a decision to change the price, addition of new features, and change in marketing strategy or delivery channel. Models can be used to show exactly, a particular change in design could impact demand. Hence, managers will use these models for decision making.
Marketers want to know which attributes of their products are valued by the consumers. This technique, which was originally developed in the early 60s by Luce and Tukey, is extensively used to answers these questions. This technique expresses product or services in terms of its attributes or characteristics. Once profiles are developed, respondents are asked to rank or rate them in order of their preference.
Steps in developing Conjoint Analysis
Companies should follow these steps in order to develop a conjoint analysis:
- Product/service attributed should be selected. For example, size, appearance, price, functionality, user friendliness.
- Each attribute should be assigned a value. These values of these attributes will represent the variance available in each of these attributes. For example, for the attribute of size, the options available could be 5”, 10” or 25”. Higher value on the scale represent, more importance attached to a particular attribute.
- Product/service should be defined as a combination of all the varying attributes, which will form the subset of all possible products that a company can manufacture or deliver.
- The combination of attributes through which a product is represented must be determined. This information can be represented through visual diagrams, prototypes or mere descriptions.
- It must be determined how the results and answers from the respondents will be aggregated. Decision makers are faced with three choices at this stage: Individuals responses could be used, the results could be aggregated to represent a single utility function or the respondents could be segmentized into sub-groups.
- Decision makers at this stage should select the technique they’ll be employing to process, organize and analyze the data, in order to draw meaningful conclusion out of the information. A popular model to represent varying attributes Part-Worth Model. Alternatively, vector models or ideal-point models could also be used.
How to determine whether conjoint analysis is an appropriate tool for a particular business?
Conjoint analysis is being used by numerous businesses across various industries ranging from financial institutions to tech firms. Health care, real estate and smart phone industry have also benefited from the use of conjoint analysis.
Conjoint analysis is appropriate for business offering products with a set of distinct features which can be categorized into different attributes. Another factor that needs to be taken into account is whether or not consumer purchase decision is based on rational thinking or not, since conjoint analysis is unlikely to provide any insight into a purchase decision that is based on impulse. Businesses manufacturing highly sophisticated products such as electronic gadgets can benefit from conjoint analysis, since their attributed can be broken down and individually analyzed and presented for consumer for ratings.
Since conjoint analysis gives an insight into market’s preferences, it can be used in a variety of different aspects of the business process. During the process of initial product development, conjoint analysis helps companies determine the optimum mix of attributes for competitive positioning. In addition to attribute ratings, it can also be used for determining market segmentation and resource allocation. .
For example, a tech firm wanting to lower costs, so that it could offer lower prices conducted a conjoint analysis. The results from the analysis showed that consumers value their product differently from the competitor’s because of some unique attributes. Hence, they decided not to lower the prices and slightly reconfigure (remove) the attributed not valued by the consumers to reduce costs. Subsequently, this helped the company increase its profits since they were able to reduce costs by eliminating superfluous features.
Interpreting the results
The result of conjoint analysis paints a quantified picture of how customers make purchasing decisions. The data collected through the analysis can be complied and organized to form market models. The models can predict consumer preferences and estimate potential market share. Market condition may impact the predictions, which means all factors which could influence the result need to be taken into account.
In order to gauge the impact of any changes to the price of the product, these models can be reliably used. Moreover, these models can also help businesses determine the optimum point, where the company could generate the highest amount of profit. Conjoint analysis is an integral part of developing marketing strategies and consumer segmentation.
Needs-based segmentation and pricing research could compliment conjoint analysis in firm quest for better marketing strategy. This also helps companies determine what resources to use during the process of new product development.
WHAT ARE THE BENEFITS OF USING CONJOINT ANALYSIS?
Conjoint analyses can break-down large number of attributes into smaller bundles for evaluations and comparison. There attributes can also be compared in pairs: Respondents can be asked to indicate preferences between sets of two or more attributes. In this case, one set of attribute appear on left and another on the right on the questionnaire. This method is simpler as compared to evaluating 15 or 25 attributes simultaneously.
A conjoint analysis is able to breakdown utility to consumer at individual level as well as aggregate of all the responses. Numerous new techniques have been recently developed which help companies determine individual level utilities for choice-based conjoint, which provide companies with useful insight which is invaluable to the decision making when it comes to marketing, pricing and product placement.
The technique offers straightforward methods for experimentation with varying factors such as price, attributes, price etc. Before a product is launched the technique helps create a product profile, which can be altered to generate additional profiles for varying attributes. Consequently this helps businesses find the balance keeping in view the relative desirability of each alternative in a choice set and uses each attribute level uniformly throughout the survey. Conjoint analysis provides information that forms the basis of market segmentation, whereby a large homogenous market is divided into smaller groups bases on demographics, preference, age group, etc. Market segmentation enables businesses to target each homogenous group more effectively since their needs and preferences are recognized, and decisions are taken according.
Conjoint analysis can also be employed to exclusive focus on product features and attributes irrespective of price or brand name, hence enabling calculation of utility on individual basis in regard to the aforementioned specific features the companies seeks to evaluate. Moreover, the technique is widely used to measure the value of brand names in comparison to competing brands. Information can be obtained as to how strong a particular brand is in comparison to specific product and price. It helps businesses make decision based on their brand value in the market, since having a popular brand may not be enough as changes in price and features could impact demand.
Conjoint analysis is an important tool which helps in evaluating brand equity and estimate how market share is impact owing to various tradeoffs between brands, prices and some specific features. Conjoint analysis can be used to determine resource allocation, since businesses have already established which attributes are valued more by the consumers through the analysis. Consequently, companies can allocate the scare resources accordingly. They can choose to eliminate or remove features which are superfluous to the customers or not valued by the consumers. This will save costs for the business, and as already established, will not impact sales, since these particular products are not valued by the customers. Reduced cost would lead to more profitability for the businesses.
Conjoint analysis could be a great help when companies are in the process of re-modeling or revamping their products and services. When new version of a product is to be launched, the questionnaire could include all possible features or attributed a company could possible add. Through conjoint analysis it can be determined which features should be included given the important respondents attach to certain attributes. This will also help ascertaining the impact it would have on costs and revenues and overall profitability.
Advantages Over Other Tools
Conjoint analysis has the ability to evaluate more than one variable unlike other two, which are only capable of measuring one variable at one time. The tool has a unique ability to provide measure preference on a scale rather than a “Yes or no” approach, which means that it gives more insightful understanding of customer behavior and their preferences. The data collected from conjoint analysis cab use to construct various models, which helps businesses make better and informed decision. Other techniques do not offer results which cannot be turned into models for further analysis.
Unlike other analysis techniques, conjoint analysis can be used to measure price sensitivity to brand names, features on individual level, which could help companies during the process of research design. Interactions between price and various attributes can be determined; hence price sensitivity due to changes in variations can be evaluated.
Image credit: Conjoint analysis adapted from Dobney.com
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