Monday, 5 September 2011

Conjoint Analysis: Method and its Application

Conjoint Analysis is concerned with understanding how people make choices between products or services or a combination of product and service, so that businesses can design new products or services that better meet customers’ underlying needs. A key benefit of conjoint analysis is the ability to produce dynamic market models that enable companies to test out what steps they would need to take to improve their market share, or how competitors’ behavior will affect their customers. Every customer making choices between products and services is faced with trade-offs. Is high quality more important than a low price and quick delivery for instance? Or is good service more important than design and looks? Or, for pharmaceuticals, are improvements in efficacy outweighed by adverse effects. For businesses, understanding precisely how markets value different elements of the product and service mix means product development can be optimized and aspects such as pricing tuned to customer's willingness to pay for specific features. By understanding precisely how people make decisions and what they value in your products and services, you can work out the optimum level of features and services that balance value to the customer against cost to the company.

Principal behind Conjoint Analysis:

The principle behind conjoint analysis is to break a product or service down into its constituent parts then to test combinations of these parts to look at what customers prefer. By designing the study appropriately it is then possible to use statistical analysis to work out the value of each part in driving the customer’s decision. For example a computer may be described in terms of attributes such as processor type, hard disk size and amount of memory. Each of these attributes is broken down into levels - for instance levels of the attribute for memory size might be 1GB, 2GB, 3GB and 4GB.These attributes and levels can be used to define different products or product profiles. The first stage in conjoint analysis is to create a set of product profiles which customers or respondents are then asked to compare and choose from. Obviously, the number of potential profiles increases rapid for every new attribute, so there are techniques to simplify both the number of profiles to be tested and the way in which preferences are discovered. By analyzing which items are chosen or preferred from the product profiles offered to the customer it is possible to work out statistically both what is driving the preference from the attributes and levels shown, but more importantly, give an implicit numerical valuation for each attribute and level.

Results and its Application:

The result is a detailed picture of how customers make decisions, a picture that can be used to build market models which can predict market share in new market conditions and test the impact of product or service changes on the market to see where and how one can gain the greatest improvements over your competitors. Not surprisingly conjoint analysis has become a key tool in building and developing market strategies.

By combining these market models with internal project costings, companies can evaluate decisions in terms of Return on Investment (ROI) before going to market.

For example determining what resources to put into New Product Development and in what areas. Conjoint analysis also forms the basis of much pricing research and powerful needs-based segmentation. All in all conjoint analysis is one of many techniques for dealing with situations in which a decision maker has to choose among options that simultaneously vary among two or more variables. The problem facing the decision maker is how to trade off the possibility that option X is better than option Y on attribute A but worse than option Y on attribute B, and so on.

Group: Marketing 3

Author of the Article - Rahul Ghosh (13157)& Krishnaraj Chaturvedi(13057)

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