Choice modelling is a newer analytical technique that falls into the preference structure modelling category. Preference structure modelling techniques provide a powerful way to understand what it is about a solution that drives customers’ interest in it and their purchase choices. It is also an excellent way to isolate the effects of a single change that a company is considering making in its solution or marketing strategy.

Conjoint and discrete choices are excellent tools when a company wishes to:

  • Configure a new product or service
  • Re-configure an existing product to increase profitability
  • Evaluate whether a new concept is viable before it is known just what features it may include
  • Better understand what drives customer preferences in the market place
  • Introduce a line-extension (while minimizing “cannibalization” of existing products and maximizing profitability of the whole line)
  • Set prices for maximum profitability

 

Choice Modelling: An Analytical Technique for Predicting Preferences

Choice modelling helps you predict customer preferences

With the right data model you can predict customer preferences.

Choice modelling, a newer technique, differs from conjoint analysis, in that customers are asked to view a series of competing offers and select one (or in some cases more than one). This approach looks at choices that customers make between offers. By identifying patterns in these choices, choice modeling models how different customers respond to a marketplace filled with competing products. Choice modeling allows marketers to examine the market-share impact of product configuration, service bundling, pricing and promotion on different classes of customers.

The premise behind choice modelling is that one can draw inferences from many choices that groups of people make. The technique is based on asking potential buyers to perform the every day: the task of choosing something from among a group of competitive options. Discrete choice models can be used to perform powerful and complex simulations of the marketplace for an entire product or service category. The impact of price changes and product enhancements on brand shares can be simulated before they are implemented, as can the effects of potential competitive responses to these actions.

Choice modeling is designed to predict the likelihood of a customer selecting one product over alternatives. It is used to measure the value a customer places on particular changes in a product and helps marketers decide what product modifications will draw the most customers.

A typical choice modelling project takes about five working weeks to execute. Costs for choice modeling projects span a broad range, from about $10,000 to $250,000 depending on the scope of a project.

 

Choice Modelling Involves These Three Steps

The process generally involves the following three steps:

  1. Conduct focus groups to identify the product’s key buying factors. Focus groups give us an opportunity to explore consumers’ motivations in detail, listen to customer’s impressions of products, programs, services, etc., and to develop hypotheses about the key factors affecting their demand and choices.
  2. Test the hypotheses from the focus groups in an experimental setting. In this step we have two options, both of which involve surveys. The first, particularly useful for existing products, consists of surveying potential customers to observe what they buy or have bought. The second option presents subjects with a set of choice experiments. In these experiments, a hypothetical marketplace containing a set of products is described and subjects are asked what they would do. They can choose to buy a product, choose not to buy, or choose to buy at a later time. We then vary the pricing and other characteristics of the products and ask them to choose again.
  3. Once the data have been collected, the final step is to build a computer model using complicated statistical techniques. The model-building process itself usually yields answers to some important questions. What are the key market segments for the product, and how price sensitive are they? How much is a brand name worth to a product? What advertising or promotional activities appear most effective? Where should we target our efforts?

 

How to Apply The Results from Your Choice Models

choice metrics predicts customer preferencesMarketers and management use the results from choice modeling studies for strategic planning and tactical marketing decisions. Some strategic applications include:

  • Identifying factors for a new product or service
  • Estimating the total potential market for a new product or service
  • Market segmentation
  • Analyzing regional demand

Tactical practical applications of choice modeling include:

  • Product/service configuration
  • Pricing
  • Positioning
  • Assessing the value of branding a new product

For more information about choice modelling, check out:

Train, Kenneth (1986) Qualitative Choice Analysis: Theory, Econometrics, and an Application to Automobile Demand. Cambridge, MA: The MIT Press.

Ben-Akiva, M. and S.R. Lerman (1985) Discrete Choice Analysis: Theory and Application to Travel Demand. Cambridge, MA: The MIT Press

Check out these resources to build on your analytics.

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