Conjoint Analysis 101

By Brett Jarvis
August 10, 2010

Understand the trade-offs you should make by understanding the trade-offs your market will make.

Rate

Product management is all about trade-offs. Whether the objective is increased market share, profit margin or revenue, every product manager makes trade-offs—quality vs. cost, time to market vs. breadth of features, richness of the offering vs. ease of use, etc.

So, how do you know what the market wants? What market segments exist? What those segments prefer? What will they pay? In short, how do you know what trade-offs to make? The answer is to get the market to make the trade-offs for you. Not the entire market, of course, just a representative sample of the market.

By using conjoint analysis, you, as a product manager, can do just that: understand the trade-offs you should make by understanding the trade-offs your market will make. Then, apply your increased market insight to your revenue, profit or share objective.

Is conjoint analysis right for me?

Conjoint analysis has been successfully applied in many industries, such as Air Travel, Smart Phones, Computers, Financial Services, Health Care, Real Estate, and Electronics. If your job includes configuring a defined set of features for a product or service and the consumer’s purchase decision will be “rational,” conjoint analysis can help. If, on the other hand, your consumer’s purchase decision will be “impulse” or “image,” conjoint is not the right tool for you. If you’re a technology product manager, conjoint analysis is right up your alley.

Because conjoint analysis helps you understand your market’s preferences, you can apply it to a variety of difficult aspects of the job, including product development, competitive positioning, pricing, product line analysis, segmentation and resource allocation. “How should we price our new product to maximize adoption?” “What features should we include in our next release to take market share from our competition?” “If we expand our product line, will overall revenue grow, or will we suffer too much cannibalization?” “For which value-added features is the market willing to pay?”

For example, a technology company was feeling pressure from a lower cost alternative and debated lowering its own prices. Then, the results of a conjoint analysis showed the market valued their products differently from the competitors. They chose not to lower prices, but to slightly reconfigure their offering. As a result, the business grew and realized substantial profits that they otherwise would have never seen. Not every situation is as dramatic as that, of course, but a conjoint analysis done right is impactful.

Conjoint analysis is a set of market research techniques that measures the value the market
places on each feature of your product and predicts the value of any combination of features.
Conjoint analysis is, at its essence, all about features and trade-offs.

What exactly is conjoint analysis?

Conjoint analysis is a set of market research techniques that measures the value the market places on each feature of your product and predicts the value of any combination of features. Conjoint analysis is, at its essence, all about features and trade-offs. With conjoint analysis, you:

  1. Ask questions that force respondents to make trade-offs among features
  2. Determine the value they place on each feature based on the trade-offs they make
  3. Simulate how the market reacts to various feature trade-offs you are considering

To demonstrate conjoint analysis in action, let’s consider cell phone plans. These plans have various feature types, which in the language of conjoint analysis are called attributes. Let’s focus on Brand, Price, Minutes, Rollover Options, and Call Options. In reality, plans can be more complicated and conjoint analysis can keep up with the complexities, but let’s keep the example simple. Each of the attributes listed above has different levels. The levels of the Brand attribute might be AT&T, T-Mobile, Verizon, etc., but here we will refer to possible Brands as Brand A, Brand B, etc.

Attributes

Levels

Brand

Brand A, Brand B, Brand C, Brand D

Price

$60/month, $75/month, $100/month

Minutes

800; 1,000; 1,400; 2,000

Rollover Options

No rollover of unused minutes
Unused minutes rollover for 1 month
Unused minutes rollover for 1 year

Call Options

No free calling based on contacts
Free calling to top 5 contacts
Free calling to top 10 contacts

 

Attributes must be something you can categorize, but they don’t have to be numeric. Note that the attributes include brand, price, and various product features. Through conjoint analysis, you gain insights into the value of your brand and the value of product features, and determine price sensitivity.

Survey the market

Conjoint analysis survey questions could take a variety of forms, depending on your study objective, but the most common type of question would be:
Which of the following cell phone plans do you prefer?

Brand A

Brand B

Brand C

1,400 minutes

1,000 minutes

800 minutes

Unused minutes rollover for 1 month

No rollover of unused minutes

Unused minutes rollover for 1 year

No free calling based on contacts

Free calling to top 5 contacts

Free calling to top 10 contacts

Costs $100/month

Costs $75/month

Costs $60/month

Derive values for each of the levels

From responses to these questions, conjoint analysis uncovers the underlying value for each level, depending on how often a level was included in the product selected. The relative value of the levels is what is relevant, in other words, how the value of one level compares to the value of another.

Page 1 / 2

About the Authors

  • Brett Jarvis is the former Global Director of Product Management for Oracle’s Advanced Customer Services business. He currently provides marketing strategy consulting for Sawtooth Technologies Consulting Group. Learn more about Sawtooth Technologies at www.sawtooth.com or follow them on Twitter at twitter.com/sawtoothconsult. Contact Brett at bjarvis@sawtooth.com


Categories:  Pricing Strategy Requirements


Post a Comment

Comment

Allowed HTML: <b>, <i>, <u>

0 Comments