A business model for assessing optimum pricing and the value of component parts
Paul Green, a professor at Wharton in the US is the father of conjoint analysis. In 1975, in the Journal of Consumer Research, he wrote an article with V Srinivasan entitled "Conjoint Analysis in Consumer Research: Issues and Outlook". It explained how market research can be used to determine how people value different components of an offer. It was a scientific approach to something that had previously been determined by psychology.
When people choose a product or service their decision is usually a trade-off of different factors. They balance the quality of the products against its price and the different benefits it will provide. A change to one of these attributes will change the likelihood of purchase. Conjoint analysis uses a mathematical program to find which attributes make the best product, what price should be charged, and what share of the market will be achieved. Conjoint analysis is a tool that predicts what people like and dislike about products and what will prompt them in their purchase choice. It is a "trade-off" tool that determines the most and least important factors in this decision-making process.
Conjoint analysis requires specialist software and in this, Sawtooth has a strong position. Conjoint analysis is best carried out by someone with a good statistical background and preferably somebody who has been trained in the use of the specialist software.
In the example below, a car is shown together with various features (attributes) and a price. The potential customer is asked to review the offer and say how likely they would be to buy the car on a scale from 1 to 7 (a 1 to 10 scale could just as easily be used) They would then see as many as 20 to 30 variations of this offer at different prices and asked to say their likelihood of purchasing it. When 200 or more people have been asked these questions, the software program carries out the trade-off analysis which determines the optimum price and mix of attributes. It also can show the value attached to each of the attributes and the share that the product could achieve if these were offered at a specific price.