A Simple Tutorial on Conjoint and Cluster Analysis

Marketing Research Rags Srinivasan Customer Segmentation and Market Share Estimation With Conjoint Analysis

Marketing is about segmentation and targeting Nothing more strategic than segmentation Cannot treat the Value proposition is Target them differently – SKUs, whole market as different for each one segment messaging Rags Srinivasan IterativePath.com

What defines a segment? Internally homogenous, externally heterogeneous

Is your segmentation valid? Meaningful, relevant and Not too small, Not too intuitively identified by large constituent variables Rags Srinivasan IterativePath.com

Conjoint analysis helps you with the clustering Premise: The whole is the sum of its parts. We can infer the relative importance of parts from the customer preference of the whole. Rags Srinivasan IterativePath.com

For Example Assign a value between 1 and 100 to these options. 100 means most likeable and 1 means least likeable Price: $2499 Price: $799 Price: $1999 Screen: 50” Screen: 42” Screen: 42” Display: LCD Display: Plasma Display: LCD Rags Srinivasan IterativePath.com

Conjoint analysis helps identify clusters Brand conscious Price Sensitive Screen size Display type Rags Srinivasan IterativePath.com

… and relative importance of attributes What is the utility value a customer assigns to each attribute? Rags Srinivasan IterativePath.com

But you cannot ask customers about every combination Use commercial software to generate a manageable set of profiles Conjoin Manageabl t Attributes Levels e set of Survey Softwar profiles e Rags Srinivasan IterativePath.com

Let Us Walk Through An Example: My Work On Airline Unbundled Pricing Questions: How much do airline customers value services like free- baggage, free drinks etc? Are airlines better off increasing ticket price instead of unbundling pricing? SFO JFK

With Following Options … 3 Airlines 2 Price Extras for Baggage, Pillows and Soft- levels: $275, drinks $250

Created 8 Profiles For Measuring Customer Utility Brand: 3 levels A manageable set of 8 Price: 2 levels profiles that stand-in for Software Baggage Fees: 2 levels all variable Pillow Fees: 2 levels combinations Drink Fee: 2 levels

Survey customers to find their utility value for each profile Rate your likelihood of choosing the option on a scale of 1 – 10 ( 8 profiles)

Model: Utility = f(Brand, Price,Fees) Write customer utility (their likelihood of picking the airline) as a linear function of these variables U = Constant + b1 * JetBlue + b2* Delta + b3* Price$275 + b4* BaggageFee$20 + b5 * PillowFee$4 +b6 * DrinkFee$2 JetBlue and Delta are mutually exclusive – 1 or 0 AA is implicitly defined when both JetBlue and Delta are 0 Price$275 = 1 means price is $275 , if it is 0 the price is $250 So on and so forth b1, b2, … are the regression coefficients that are the relative utilities of attributes that we seek to find

Use SPSS to indentify clusters This margin is too narrow to contain it. Stay tuned I will add a Camtasia demo of using SPSS to do Cluster analysis and Regression. Rags Srinivasan IterativePath.com

Run multiple regression for each cluster to find the coffecients U = 8.36 + 0.88 * JetBlue – 0.06 * Delta – 1.9 * Price$275 – If we did not 2.41 * BaggageFee$20 – 0.83 * PillowFee$4 – 0.79 * cluster DrinkFee$2 U = 7.9 + 1.28 * JetBlue – 0.16 * Delta – 2.34 * Price$275 – Cluster 1 3.14 * BaggageFee$20 – 0.92* PillowFee$4 – 0.87 * DrinkFee$2 U = 8.6 + 0.4 * JetBlue + 0.17 * Delta – 1.24 * Price$275 – Cluster 2 1.68 * BaggageFee$20 – 0.63* PillowFee$4 – 0.58 * DrinkFee$2 Rags Srinivasan IterativePath.com

You can see the difference between two clusters JetBlue, $250, Baggage Fee $20, Pillow Fee $4, Drink Fee $2 Cluster 1 Cluster 2 JetBlue 9.18 9 $250 0 0 Baggage Fee $20 -3.14 -1.68 Pillow Fee $4 -0.92 -0.63 Drink Fee $2 -0.87 -0.58 Total Utility 4.25 6.11

Compute market share from the utility values of the brands Market Utility Share of Product i of Product i  Ui MS i     U1 U 2 U 3 Feb 11, 2009

The net of this is When you want to segment customers and target them with multiple SKUs you need to do cluster analysis Conjoint analysis gets you there and more

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A Simple Tutorial on Conjoint and Cluster Analysis

by Iterative Path on Apr 26, 2009

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A Simple Tutorial on Conjoint and Cluster Analysis — Presentation Transcript