Factor Analysis

Factor analysis is a method that reduces the number of variables based on the underlying unobservable variables that are reflected in the observed variables.

There are 2 types of factor analysis:

• Exploratory Factor Analysis – it attempts to discover the nature of the variables that are influencing the responses.
• Confirmatory Factor Analysis – it confirms something that is already known

In marketing, factor analysis is more commonly used to study interrelationships among variables in an effort to find a new set of variables which express what is common among all the original variables. Factor analysis is used:

• To reduce the number of original variables while maximizing the amount of information in the analysis i.e. the new variables now account for most of the variance.
• To search for distinctions when the amount of data is very large.
• To test a hypothesis.

However, factor analysis is not an end in itself; the factors need to be subjected to further analysis (such as discriminant analysis etc).

In marketing, factor analysis is generally applied by changing one variable to see what effect it has on the outcome. An infinite number of marketing variables can exist which is why it is necessary to alter one variable at a time. Eg. Marketing variables influencing the sales of a product include the product, the product packaging, the size of the product and the colour of the product. The price, distribution channels and marketing strategies may also be variables of the product that can be changed to see how the change makes a difference in the sales of the product.

Factor analysis in marketing is important because it reflects the perception of the buyer of the product. By testing variables, it is possible for marketing professionals to determine what is important to the customers of the product. It is imperative to use factor analysis in marketing to create the ideal product for customers, which in turn, would increase the sales of the product.

Companies test variables with factor analysis in marketing using tools such as focus groups and surveys. This is because making changes to the product in order to test the variables on a big sample size can be expensive. Thus companies choose small groups which include a combination of past users, current users and non-users. Studies are conducted in the form of surveys and focus groups which allows companies to gather pertinent information without drastically increasing the cost to manufacture the product. Focus groups and surveys allow companies to gather perceptual information from this sample.

Ref: http://smallbusiness.chron.com/importance-factor-analysis-marketing-1698.html

Author: Makushla Marion Santimano

Group: Marketing - Group 4