Decision Making Through Conjoint Analysis
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The document discusses the integration of behavioral economics, particularly status quo bias (SQB), into market research methodologies like conjoint analysis to improve the accuracy of predicting consumer behavior and market shares. It illustrates the shortcomings of traditional neoclassical economic methods in capturing the complexities of consumer decision-making and demonstrates how SQB can lead to more realistic market share forecasts through a three-step approach. The findings suggest that incorporating SQB in analysis can significantly reduce predicted shares of new products while increasing the market share of established brands.
Decision Making Through Conjoint Analysis
- 1. © Absolutdata 2014 Proprietary and Confidential Chicago New York London Dubai New Delhi Bangalore SingaporeSan Francisco www.absolutdata.com July 14, 2014 Incorporating Behavioral Economics in Decision Making Through Conjoint Analysis
- 2. © Absolutdata 2014 Proprietary and Confidential 2 Agenda 2 Economics and Market Research 3 Introduction to Status Quo Bias (SQB) 4 Implication of SQB in Market Research 5 Incorporating SQB in Market Research through Conjoint Analysis 6 Results, Findings and Impact Neoclassical Economics Behavioral Economics 1 Background
- 3. © Absolutdata 2014 Proprietary and Confidential 3 What could have gone wrong with this business decision that was purely data driven? The answer lies in the detail, technique employed in market research missed a key aspect of consumer behavior in decision making…… Let’s Understand Believes in Data Brand Manager for Yummy Cookies (YC).. Already three flavors in the market with lots of competitors Background Mr. Ross YC Plans to launch new Strawberry Flavor cream Cookies Not sure about expected market share, Mr. Ross decides to go for Market Research through Conjoint Analysis Predicts 15% Market Share and decides on a $20mn investment Actual Market Share 10% Revenue Generated $15mn Net Loss $5mn
- 4. © Absolutdata 2014 Proprietary and Confidential 4 Key question … Is the Neoclassical Economics based technique holistic ???? Neoclassical Economics is Key Element of Traditional Market Research Techniques Market Research Techniques Conjoint Analysis Based on Neoclassical Economics Follow statistical, analytical & quantitative approach A technique to capture consumer’s preferences in real life Consumers are assumed to make rational decisions Preference shares are calculated by maximizing utility Governedby Neoclassical Economics Rationality
- 5. © Absolutdata 2014 Proprietary and Confidential 5 Questioning Traditional Wisdom Do consumers always think rationally? Are there any other factors affecting consumer behavior and decision making ? However, Behavioral Economics Plays a Key Role in Decision Making These questions cannot be accounted for using neo – classical economics, hence an analysis done on strictly traditional lines tends to give an incomplete picture of the consumer psyche. This is where Behavioral Economics comes into play Behavioral Economics brings in new dimensions to the traditional economic theory and studies the effects of social, cognitive and emotional factors on consumer decision making Behavioral Economics
- 6. © Absolutdata 2014 Proprietary and Confidential 6 Immediacy Effect (Discounting the future ): Caring more about well being now versus at a later stage Halo Effect (Anchoring/Benchmarking): Using an initial piece of information to make subsequent judgments Risk Aversion: Tendency of an individual to avoid Risk when making choice under uncertainty Confirmation Bias: The tendency of individuals to favor information that confirms their beliefs or social beliefs Status Quo Bias… How it affects Market Research??? Key Concepts in Behavioral Economics Status Quo Bias (Loss Aversion): Tendency of an individual to stick to current state of affairs Attribute Priming: The influence of prior exposure resulting in activation of consumer’s mind space to certain feature/ attribute
- 7. © Absolutdata 2014 Proprietary and Confidential 7 Status Quo Bias is a cognitive bias that results from, • A higher preference for the current state of affairs • Change from the current status being perceived as a loss. Hence, impacts decision making Should I buy this new product? NO ! I will maintain my current purchase decision Yes Status Quo Bias in Decision Making Holistic view of a Consumer’s Purchase Decision Behavioral Economics Emotional & Cognitive Behavior Neoclassical Economics Rationality & Utility Maximization Incorporating Status Quo Bias in research is important in order to evaluate the consumer’s purchase decision holistically
- 8. © Absolutdata 2014 Proprietary and Confidential 8 BUT ! Accordingly… Conjoint Analysis, a market research technique, is very commonly used to predict shares of new products in the market Incorporating Status Quo Bias in Market Research In its current framework, it does not fully account for the softer aspect of consumer’s decision making such as Status Quo Bias The following slides elaborate the approach to incorporate Status Quo Bias in Conjoint Analysis
- 9. © Absolutdata 2014 Proprietary and Confidential 9 Typical Conjoint (CBC) Framework (without incorporation of SQB) The propensity of selection of an absolutely new product offerings tends to be high, due to, Out of the following product options, please indicate the option that you are most likely to purchase Option 1 Option 2 Option 3 Option 4 Brand Brand C Brand A Brand E None of these options Flavor Flavor 2 Flavor 1 Flavor 3 Price (Rs) 11 13 10 Preferred Choice o o o Respondents are asked to choose among three product concepts and one “None” Lower time involved in decision making No risks involved for making a wrong choice and Attractive presentation of the new product options in the survey A Typical Conjoint (CBC) Framework
- 10. © Absolutdata 2014 Proprietary and Confidential 10 Option 1 Option 2 Option 3 Brand Brand A Brand D Brand C Flavor Flavor 1 Flavor 2 Flavor 3 Price (Rs) 11 13 8 Preferred Choice o o Incorporation of Status Quo Bias in Conjoint – Absolutdata’s Three Step Approach “Status Quo Bias” in Conjoint – Absolutdata’s three step approach Which among the following is your most preferred product ? o Brand A – Flavor 1 o Brand A – Flavor 2 o Brand B – Flavor 2 o Brand C – Flavor 1 o….. Brand B – Flavor 1 Step 1 – Selecting ‘most preferred product’ before the conjoint exercise Step 2 – Making a choice out of the available product concepts in a choice task You mentioned that you will chose “Brand D – Flavor 2” if available in the market. Are you willing to replace it with “Brand B- Flavor 1” if available at the same price? oYes oNo Step 3 – Capturing willingness to replace ‘most preferred product’ with conjoint product Step 3, which probes the respondent about willingness to replace his/her most preferred product captures the inertia of a respondent to change from the current state of affairs, hence capturing SQB
- 11. © Absolutdata 2014 Proprietary and Confidential 11 Absolutdata’s Hypothesis – Incorporation of SQB in conjoint will lead to… Reduction in shares of new products Highest reduction in shares if a new brand launches a new product Increase in shares of the market leader But Does This Approach Really Works? Absolutdata’s Proof of Concept Implementation of the three step approach - How did we do it? A comparative study of Choice Based Conjoint (CBC) (control group) and conjoint with Absolutdata’s SQB framework (test group) was undertaken using an online survey The category was chosen from amongst the packaged food industry and had a clear market leader. New entrants had a hard time drawing shares Each product in the conjoint exercise was defined by three attributes – Brand, Flavor and Price; having six levels each Control Group Test Group Similar set of respondents Administered CBC Administered Conjoint with SQB framework
- 12. © Absolutdata 2014 Proprietary and Confidential 12 56% 18% 9% 3% 13% 1.26% 80% 2% 1% 0% 16% 0.04% CBC Conjoint with SQB Framework Product No. 1 2 3 4 5 6 Brand Brand A Brand A Brand B Brand B Brand C Brand F Flavor Flavor 1 Flavor 2 Flavor 1 Flavor 2 Flavor 1 Flavor 6 Price ₹ 10 ₹ 12 ₹ 10 ₹ 12 ₹ 10 ₹ 10 Preference Shares Shares of new products reduced as we moved to the SQB conjoint Share of the market leader increased on moving to the SQB conjoint New Brand/Flavor New Product Results: There is a Significant Decline in New Product Shares After Incorporating SQB Results – Shares from Market Simulation Forecasted shares in SQB framework tend to be very near to the actual market reality
- 13. © Absolutdata 2014 Proprietary and Confidential 13 More Results: Other Hypothesis Also Proved Without Impacting Key Consumer Behavior Results – Reduction in shares of New Products Reduction in shares were the highest if a new brand launches a new flavor S. No. Brand Flavor Price 1 Brand F Flavor 6 10 2 Brand F Flavor 1 10 3 Brand A Flavor 6 10 89% 64% 97% % Reduction in shares Note – Reduction measured when we look at shares from normal CBC to that of CBC with SQB framework New Brand/Flavor Maximum % reduction in shares Results – Attribute Importance The order of attribute importance was the same in both the conjoints, Brand followed by Flavor and Price, showing consistency in consumer behavior Attribute Brand Flavor Price 11% 41% 48% 17% 33% 49% Traditional Conjoint Conjoint with SQB Framework Attribute Importance As expected ‘Brand’ comes out to be the most important attribute Degree of importance for ‘Flavor’ is higher in Conjoint with SQB framework
- 14. © Absolutdata 2014 Proprietary and Confidential 14 Hypothesis Verified True False Shares of new products were reduced Reduction in shares was the highest if a new brand launched a new product Share of market leader was increased Absolutdata’s Hypothesis Various hypothesis tested through the study were proven to be true when we moved to the conjoint with SQB framework
- 15. © Absolutdata 2014 Proprietary and Confidential 15 Impact of Absolutdata’s Conjoint with SQB Framework Incorporated YC Plans to launch new high fiber Cookies Mr. Ross decides to go for Market Research through Conjoint Analysis Predicts 10% Market Share and decides on a $10mn investment Revenue Generated $12mn Net Profit $2mn SQB incorporated Conjoint Framework resulted in more Accurate and Realistic market shares thus resulting in higher Returns on Investment He now knows that Consumers’ behavior affects decision making and so goes for SQB incorporated Conjoint Analysis Actual Market Share 9%
- 16. © Absolutdata 2014 Proprietary and Confidential 16 Applications in Industry There could be a Ross in any of the industries where consumers have a strong brand loyalty and deep emotional connect with their favorite products, like: Automobiles Cosmetics CigarettesPackaged foods Beverages Relevance in different industries
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