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Part worth analysis

Introduction
Part worth analysis is the process whereby some unknown response variable, such as
market share, can be estimated by summing up the weighted contributions from several
independent variables, such as product features. The weights associated with each independent
variable are the “‘part-worth”’ values, because they describe the value added to the market share
by a change in any one of the product’s features. In this way it is possible to build an equation
relating product features and market share; a general form of this is
shown in Figure 1. M represents the market share number, W the weight
of the feature, and V the “goodness” of the feature; i indicates a product,
and j indicates a feature. The goal of part worth analysis discussed
herein is to determine the mathematical relationship between key
features of an electronic reader device and its market share.
There are many different methods through which the part worth
weights can be determined, two of which are discussed here. The first, “Survey Method” is via a
simple survey – it is possible to simply ask customers how important each feature is to them. The
second way, “Multinomial Logit Method”, is through the use of multinomial logit analysis,
which infers information about how important each attribute is to a purchase decision.

Survey Method
This method involves two individual short surveys: one intended to gauge the quality of
the features of a product, and one to determine what the customer believes drives his or her
purchasing decisions. The former “Product Survey”, shown below, would be used to determine
the perceived quality of electronic reader features by the consumer. Many of these forms would
need to be filled out for each product being compared; including the Skiff itself. After the data is
collected, the values would need to be averaged to determine “goodness” of each feature, Vi,j.

Product Survey
Screen Size (poor) (excellent)
Weight (far too heavy) (ideal)
Battery Life (poor) (excellent)
Wireless / 3G (none) (excellent)
Navigation (poor) (excellent)
Price (expensive) (inexpensive)
Other features (poor) (excellent)
The latter “Weight Survey”, intended to determine parameter weights, is shown below.
Being independent of physical product, only one set of such data would need to be collected.
Many of these surveys would need to be filled out and averaged to determine theoretical
parameter weight estimates, Wi,j

Weight Survey
Screen size (not important) (very important)
Weight (not important) (very important)
Battery life (not important) (very important)
Wireless / 3G (not important) (very important)
Navigation (not important) (very important)
Price (not important) (very important)
Other features (not important) (very important)
Multinomial Logit Method
The second method of determining weights is by using a multinomial logistic regression,
which is different from a standard regression in that it does not assume evenly distributed error.
Multinomial logit has several advantages over the “survey method” described above, which will
be discussed later. The idea behind this method is that the weights are determined analytically
from actual purchase decisions that consumers make. This still requires the use of a survey;
although only one survey is needed, it would need to be more involved. An example of such a
survey is shown below, titled “Logit Survey”. Product names are just examples; survey could be
easily modified to suit any set of competitor products.

Logit Survey
Instructions: Rank each of the products from 1 (poor/expensive) to 10
(excellent/inexpensive) in each category. For “buy”, select which product you would be
willing to purchase assuming you had to buy one.

Kindle DX Kindle 2 Nook Sony Pocket Sony Touch


Screen Size
Weight
Battery Life
Wireless / 3G
Navigation
Price
Other features
Buy
(check exactly one)
As you can see, the customer would need to be asked about how he or she would rate
several products at the same time. One way of doing this would be to have one of each of the
products on hand during the survey and let surveyors examine each product and then decided
which of them that they would buy. It may be necessary to pay survey takers in this case for their
time, as this process would take a little while to complete. From this table of known values with
a buy/don’t buy outcome, the logit is able to determine the part worth weights for each
parameter.
The multinomial logit method can be calculated by using Matlab’s mnrfit function
(Multinomial logistic regression) which returns, among other things, a matrix B of parameter
weights and a matrix T of T statistics for matrix B. Use of the function is documented on
Matlab’s website, http://www.mathworks.com/access/helpdesk/help/toolbox/stats/mnrfit.html. In the
context of this analysis, B values become Wj; Vi,j is obtained by averaging the survey values for
each product (same as survey method). Values for the Skiff itself can be obtained by using many
Product Surveys (as in the survey method) only for the Skiff; this would probably be in a closed
group, since the Skiff is yet to be released and does not have a price named yet.

Data Analysis
Now that weights have been determined a data table can now be populated with the
results, as shown in Table 1 below. Both V and W are dependent variables derived from survey
results, via either averaging or logit. Once these values and weights have been determined, the
analysis is the same for both data techniques.

Table 1 – Raw scores


Screen Battery Wireless/ Other
Product Weight Navigation Price
size life 3G features

Skiff V1,1 V1,2 V1,3 V1,4 V1,5 V1,6 V1,7

Competitor
V2,1 V2,2 V2,3 V2,4 V2,5 V2,6 V1,7
1
Competitor
V3,1 V3,2 V3,3 V3,4 V3,5 V3,6 V3,7
2
Competitor
V4,1 V4,2 V4,3 V4,4 V4,5 V4,6 V4,7
3
Feature
W1 W2 W3 W4 W5 W6 W7
Weight

Next, Wi can be multiplied up the columns to “weigh” the survey values appropriately
and sum them as in Table 2. For example, say a product earned a 10 for Navigation and a 4 for
Price and the consumers decided that Navigation was not important at all (weight = 1) whereas
Price as very important (weight = 10). By ‘weighting’ these values with consumer weights, even
the perfect Navigation score, weighted at 1*10=10, will only contribute 1/4 that of the Price
score at 10*4 = 40. This is the key to part worth analysis; in this example, the part worth of
Navigation is much less than that of Price because it contributes much less to overall utility.
Table 2 – Weighted scores
Screen Battery Wireless Other
Product Weight Navigation Price Mi
size life / 3G features

Skiff W1*V1,1 W2*V1,2 W3*V1,3 W4*V1,4 W5*V1,5 W6*V1,6 W7*V1,7 M1

Competitor
W1*V2,1 W2*V2,2 W3*V2,3 W4*V2,4 W5*V2,5 W6*V2,6 W7*V1,7 M2
1
Competitor
W1*V3,1 W2*V3,2 W3*V3,3 W4*V3,4 W5*V3,5 W6*V3,6 W7*V3,7 M3
2
Competitor
W1*V4,1 W2*V4,2 W3*V4,3 W4*V4,4 W5*V4,5 W6*V4,6 W7*V4,7 M4
3

At this point, Mi can be determined by summing up each row. Mi is the


market value of the product, which can be used to calculate the final market share
percentage. The market share percentage can be found by dividing Mi by the sum
of all the other M values; this general form is shown in Equation 2. For this
example shown in Table 2, the market share for the Skiff is shown Equation 3.

Now that we have theoretical solutions, Table 3 contains an actual example of this process. All of
the feature values are based on real world feature technical specifications; weights are speculative.

Table 3 – Hypothetical data


Screen Battery Wireless Other
Product Weight Navigation Price Mi
size life / 3G features

Skiff 8 3 6 4 8 P 7 M1

Kindle DX 6 2 6 4 5 5.11 3 M2

Nook 2 6 6 9 6 7.41 5 M3

Sony Touch 2 7 6 1 6 7.01 5 M4

Feature
5 3 4 2 5 9 4
Weight
With some computation, M2 = 150.99, M3 = 186.69, M4 = 170.09. Importing the rest of the
variables into the model, it is simple to calculate an equation for the market share of the Skiff, as shown
in Equation 4. Equation 4 is graphically represented in Figure 1.

Figure 1

Clearly, market share of the Skiff depends greatly on how it is priced. It is strange to see market
share increase with P, but remember that this is because P is not directly related to dollars. In fact, P is
just a value that surveyors assigned, where 10 is the best possible value (lowest price) and 1 is the lowest
value (highest price). This analysis is not limited to price; any feature can be examined to see how it
affects market share in this manner. Some features will undoubtedly affect the market share more than
others.
Comparison of Survey Method and Multinomial Logit Method
Survey Method
Strengths
Simplicity – Creating, taking, and scoring these surveys is a simple process. Only one
product has to be reviewed at a time, and the only calculation required to obtain the
weights is by averaging values.
Customer opinions – This method allows direct opinions from the customers; they are able to
weigh the importance of features based on how important they actually believe them to
be.
Weaknesses
Customer opinions – Unfortunately, allowing customers to weigh features can also be a
weakness; many people are not able to analytically determine their purchasing rational,
and are unable to provide accurate indicators of purchasing decisions.
T statistics – There is no way under this data collection method to determine how statistically
relevant the predictors actually are. Some features may not even affect purchase decisions
at all but still carry weight.

Multinomial Logit Method


Strengths
Real purchasing decisions – Weights now come solely from the statistical analysis of actual
purchase decisions where the surveyor has marked that he would buy one specific
product over all others.
Constant terms – The logit process incorporates a constant term into all predictors, which
describes how important other factors besides those that were asked for are to the
consumer when making purchase decisions.
T statistics – The logit also provides T statistics which describe how relevant a predictor
actually is to the response. Likely, some factors will have very little affect on the
consumers purchasing decisions.
Weaknesses
Long and involved – The logit process requires a much more complicated survey than the
other method, and also involves significantly more mathematical analysis to convert the
data into a set of weights and T statistics.

Conclusion
Through a series of surveys and mathematics it is possible to create a part-worth model
that can be used to determine the predicted market share for a given product market, such as
electronic readers. It is then possible to manipulate independent variables such as price to
determine what changes would need to be made to acquire more or less market share.
Multinomial logit is a more powerful technique for determining product weights from surveys
and provides superior results at the expensive of greatly increased complexity and time required
to collect data.

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