PRODUCT DEVELOPMENT & DESIGN Lecture 9- Conjoint Analysis

Wednesday, April 22, 2014Rabeel Khan

PIA Airblue

Which do you Prefer?

PIA Airblue

Now…Which do you Prefer?

Rs. 20,000

Rs. 17,000

PIA Airblue

Now…Which do you Prefer?

Rs. 20,000

Rs. 17,000

Non-stop 1-stop

But, its not as simple as that…

Option 1 PIA

Rs. 20,000 1 Stop

Option 2 PIA

Rs. 20,000 Non-Stop

Option 3 PIA

Rs. 17,000 1 Stop

Option 4 PIA

Rs. 17,000 Non-Stop

Option 1 Airblue

Rs. 20,000 1 Stop

Option 2 Airblue

Rs. 20,000 Non-Stop

Option 3 Airblue

Rs. 17,000 1 Stop

Option 4 Airblue

Rs. 17,000 Non-Stop

Task

Divide the cards into three piles“Like” “Don’t Like” “Neutral”

Rank order the cards from 1-8 where 1 is “most like” and 8 is “least like”

Option Rankings

Brand Price Journey Consumer 1 Consumer 2

PIA Rs. 20,000 1-Stop

PIA Rs. 20,000 Non-Stop

PIA Rs. 17,000 1-Stop

PIA Rs. 17,000 Non-Stop

Air Blue

Rs. 20,000 1-Stop

Air Blue

Rs. 20,000 Non-Stop

Air Blue

Rs. 17,000 1-Stop

Air Blue

Rs. 17,000 Non-Stop

Conjoint Analysis

CA is a multivariate technique used to understand how consumers develop preferences for products or services

A fundamental idea behind conjoint analysis is that a product can be broken down into a set of relevant attributes

Each attribute has a level associated with it

Key Terminology

Attributes are features and characteristics that define various aspects of a product or service. For example, attributes for airplanes include can include "brand origin," "price," “journey,” etc.

Levels are the values that each attribute may take. For example, Brand Origin could be “PIA” or “AirBlue” and Price could be “Rs. 20,000” or “Rs.17,000”

Profiles are hypothetical products or services described as bundles of attributes that are each set at a particular level.

Test Your Knowledge 1

Think about a credit card and narrow down the following:

Attribute

Level

Profile

Test Your Knowledge 2

Now, think about a bicycle and narrow down the following:

Attribute

Level

Profile

Utilities

Utilities (Partworths)

In conjoint analysis, we assume that each level of each attribute has a certain utility (quantitative value) for the consumer

The utility of each level of each attribute is called a partworth, because it captures how much this PART of the product is WORTH to the consumer

The utility of a profile, is the sum of the partworths of the attribute levels in the profile. 

Exercise

Consider a fitness facility interested in optimal design of its locker rooms

Which two attributes might you think would be determinant? Whether or not there is a sauna Size of the lockers

How many levels can you associate with each of these attributes? 2 levels for Sauna: “Yes” & “No” Three levels for locker size: “Small” “Medium”

“Large”

Exercise

How many different sauna/locker combinations can you come up with?

6 different combinations How important do you think each of the

combinations are? Rankings or Ratings Calculate the utility of an attribute level

by taking average of the score across choices where it appears

Exercise: “What are utilities?” Average Rankings for Sauna

Sauna

Yes 3.33

No 1.67

Locker

Medium 4

Small 3

Large 0.5

This is the individual’s “value system”-how an individual

values each level of an attribute

Exercise

Product Value System Score

Value System Rank

Stated Original Rank

Medium + Sauna

4+3.33=7.33 1 1

Small + Sauna 3+3.33=6.33 2 2

Medium + No Sauna

4+1.67=5.67 3 3

Small + No Sauna

3+1.67=4.67 4 4

Large + Sauna 0.5+3.33=3.83 5 5

Large + No Sauna

0.5+1.67=2.17 6 6

Conjoint Analysis &

Concept Generation

Concept Generation

Factor Utility Scores-Coffee Example Attributes are: Flavor, Strength, Intensity of Aroma How many levels can you come up with? How many combinations should exist?

New concept for Prepared Salsas 3 attributes: Which ones are these? How many levels of each? How many combinations?

Conjoint Analysis Output- Salsa Data

Calculate the Range of each attribute

Which is the most important attribute?

What can you say about the desirability of alternate levels of each attribute?

Calculate the percentage importance of each attribute?

Which attribute is the most important?

Exercise

Select a Personal computer on four attributes: weight, battery life, quality of resolution of screen, and price. A standard conjoint analysis produces the following value system for an individual:

If three products described below are available, which product would the consumer purchase?

Value of Attributes

Hybrid Standard

VS

An Example: Hybrid Autos

Attribute

Attribute I: Feedback

No Feedback ProvidedFeedback on the Current Miles Per

Gallon

Feedback on the Current Greenhouse

Emissions

Both MPG and Emissions Feedback

Attribute II: Brand

Honda Toyota Ford Chevrolet Chrysler

Nissan Hyundai VW Tesla

Attribute III: Annual Maintenance Costs

$100 $250 $500 $1,000 $1,500 $2,000Attribute IV: Price

$13,500 $17,500 $21,500 $25,500 $29,500 $33,500Attribute V: Miles Per Gallon

15 MPG 25 MPG 35 MPG 45 MPG 55 MPG 65 MPGAttribute VI: Type of Fuel

Gasoline E85 Clean Diesel BioDiesel Natural Gas Propane Hydrogen

Attribute VII: Type of Engine

50/50 Hybrid 20/80 Hybrid Electric Hydrogen Fuel Cells Combustion

Attribute Importance

9.00

11.00

13.00

15.00

17.00

19.00

9.99

15.9915.02 15.11

18.77

12.1612.96

Feedback

GREENHOUSE

BOTH MPGs NONE

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

Brand

HONDA

TOYO

TA

FORD

CHEVY

CHRYSLE

R

NISSA

N

HYUNDAI VW

TESL

A

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

Maintenance Costs

$100 per year

$250 per year

$500 per year

$1000 per year

$1500 per year

$2000 per year

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

Price

MSRP = $13500

MSRP = $17500

MSRP = $21500

MSRP = $25500

MSRP = $29500

MSRP = $33500

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

MPG

15 MPG 25 MPG 35 MPG 45 MPG 55 MPG 65 MPG

-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

Fuel

Gasoline E85 Clean Diesel

BioDiesel Natural Gas

Propane

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

Engine

Hydro

gen

50/5

0 Hyb

rid

20/8

0 Hyb

rid

Elec

tric

Hydro

gen

Fuel C

ells

Combu

stion

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

Determining the Value of the Hyrbid

Ratios of Utility Comparison (Not perfect, but can get close with balanced attributes)

Take a Price-Based Measure as a Baseline and calculate the difference in utility between the highest and lowest price

Take your Attribute of interest and calculate the difference in utility between two levels

Divide the Attribute of Interest Utility Difference by the Price Utility Difference

Multiply this ratio by the price difference VOILA --- you have the relative price difference

between two attributes

An Example

What is the value of providing Gasoline versus Clean Diesel as Fuel? Calculate the Difference in Price Utilities:

$13,500 = 49.85 $33,500 = -50.29 DIFFERENCE = 100.1444

Calcualte the Difference Between Diesel and Gasoline: Clean Diesel= 2.86 Gasoline = -2.25 DIFFERENCE = 5.12

5.12 / 100.14 * $20,000 = $1,022.52

Calculate the Following:

Brand Premium that Honda can Command over Chrysler

How much consumers are willing to pay to improve from 55 MPG to 65 MPG

How much consumers are willing to pay for a hybrid versus a combustion engine

How much customers are willing to pay to improve from 23 MPG to 35 MPG

Uses of Conjoint

Conjoint Applications

Which features should we include in our products/services?

How many different products/services should we offer? How much are consumers willing to pay for each

feature of our product/service? How much would they be willing to pay extra for an improvement on an existing characteristic?

How should we price our products/services? What market share should we expect to obtain if we

launch product/service X? How do consumers differ in their preferences? Which

segment(s) of consumers should we focus on serving? What product(s) would appeal to this (these) segment(s) relative to existing alternatives in the marketplace?

New Product Testing

Do consumers prefer a refillable cleaner to our standard offerings?

Do consumers prefer a refillable cleaner to our standard offerings?

New Product Testing

Can we command a premium by introducing this new packaging concept?

Do consumers prefer a refillable cleaner to our standard offerings?

Can we command a premium by introducing this new packaging concept?

New Product Testing

How much can we charge for the refills?

Other Uses…

New Product Design Pricing Packaging Decisions Market Share Estimation Strategic Advertising Cost-Benefit Analysis Market Segmentation