Market segmentation through conjoint analysis using latent class models

Abstract

Conjoint Analysis is accepted by market researchers as a reliable and suitable instrument for measuring consumer preferences. The popularity of conjoint analysis hinges on the belief that it produces valid measurements of consumer preferences for the features of a product or service. It is the marketers’ methodology for assessing the impact of proposed actions on the market and finding out how buyers trade-off among competing products and suppliers. A popular application of conjoint analysis is market segmentation which addresses the heterogeneity in consumer preferences. Market segmentation assumes that a heterogeneous population is represented as a collection of homogeneous subgroups where customers in each cluster have similar needs and similar views of how to worth a product. Other applications of conjoint analysis include pricing strategies, product positioning, competitive analysis, promotional policies, new product identification and distribution decisions. This paper describes the issues in implementing conjoint analysis and then illustrates the methodology to perform market segmentation using latent class analysis. The application focuses on customer preferences when evaluating the worth of mobile phones given demographic and product- related predictors.