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Database Marketing. Factor Analysis. Web Advertising. Objective: Identify the profile of customers who visit your website Important information for advertisers who may wish to use your advertising services. Repositioning your Web Site.

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database marketing

Database Marketing

Factor Analysis

N. Kumar, Asst. Professor of Marketing

web advertising
Web Advertising
  • Objective:
    • Identify the profile of customers who visit your website
    • Important information for advertisers who may wish to use your advertising services

N. Kumar, Asst. Professor of Marketing

repositioning your web site
Repositioning your Web Site
  • You may wish to learn of features that consumers value when browsing thro’ websites
  • Analysis of consumer data may help uncover different facets (dimensions) of customers’ preferences
  • Can make a perceptual map to help form the basis of your strategy

N. Kumar, Asst. Professor of Marketing

how can factor analysis help
How can Factor Analysis Help?
  • Often Factor Analysis can help summarize the information in many variables into a few underlying constructs/dimensions
  • Reduces the number of variables that you have to deal with little loss of information

N. Kumar, Asst. Professor of Marketing

why reduce data
Why Reduce Data?
  • Census Bureau – each zip code has more than 200 pieces of information
  • Typical customer survey on attitudes, lifestyles, opinions will probably have responses to more than 100 questions

N. Kumar, Asst. Professor of Marketing

why reduce data contd
Why Reduce Data … contd.
  • Too much data can be hard to absorb and comprehend
  • Difficult to work with too much data
  • Even if you can get it to work results will be distorted (multicollinearity problem) – regression example

N. Kumar, Asst. Professor of Marketing

what is factor analysis
What is Factor Analysis?
  • What is Factor Analysis?
    • Factor analysis is a MV technique which analyzes the structure of the interrelationships among a large number of variables
    • Can identify the separate dimensions of the structure and can also determine the extent to which each variable is explained by each dimension

N. Kumar, Asst. Professor of Marketing

factor analysis intuitive description
Factor Analysis: Intuitive Description
  • Factor Analysis summarizes information in Data by reducing original set of “items”/attributes to a smaller set of “factors”/“dimensions”/“constructs”
  • A Factor can be viewed as an “Index”:
    • Dow Jones Index -- summarizes the movement of stock market
    • Consumer Price Index -- reflects prices of consumer products and indicator of inflation
  • How to create such an “index” that appropriately summarizes the data with the minimum loss of information?

N. Kumar, Asst. Professor of Marketing

factor analysis intuitive description cont
Factor Analysis: Intuitive Description (cont.)
  • How does Factor Analysis work?
    • Factor Analysis “constructs” factors/axes by including original attributes with different weights
    • If the responses are rated almost identically for an attribute, Factor Analysis gives much lower weight
    • If two attributes, say attributes #3 and #4, are highly correlated i.e. stores which rate highly on attribute #3 are also rated high on #4, Factor Analysis treats #3 and #4 as measurements of the same underlying construct

N. Kumar, Asst. Professor of Marketing

factor analysis e admission
Factor Analysis: e-admission
  • Data: Students’ scores on different subjects – say Physics, Chemistry, Math, History, English and French
  • Task at hand: to make an assessment about the student’s ability to succeed in school given these scores
  • Do we need to look at the scores on all subjects or can we use a simplified heuristic?

N. Kumar, Asst. Professor of Marketing

single factor model
Single Factor Model

Suppose we could get something like this:

M = 0.8 I + Am P = 0.7 I + Ap

C = 0.9 I + Ac E = 0.6 I + Ae

H = 0.5 I + Ah F = 0.65 I + Af

A’s denote aptitude specific to the subject

N. Kumar, Asst. Professor of Marketing

factor analysis vs regression
Factor Analysis vs. Regression
  • Regression
    • Have data on I
    • Objective is to work out the weight on I
  • Factor Analysis
    • I is the underlying construct that we are trying to work out

N. Kumar, Asst. Professor of Marketing

some terminology
Some Terminology
  • Communality – that which is common with the variable and the underlying factor.
    • Formally, the square of the pattern loading
  • Unique/Specific Variance – that which is unexplained by the factor(s)

N. Kumar, Asst. Professor of Marketing

input correlations
Input: Correlations

N. Kumar, Asst. Professor of Marketing

results
Results

N. Kumar, Asst. Professor of Marketing

two factor model
Two-Factor Model

Suppose we could get something like this:

M = 0.8 Q + 0.2 V +Am P = 0.7 Q + 0.3 V + Ap

C = 0.6 Q + 0.3 V +Ac E = 0.2 Q + 0.8 V + Ae

H = 0.15 Q + 0.82 V +Ah F = 0.25 Q + 0.85 V + Af

A’s denote aptitude specific to the subject

N. Kumar, Asst. Professor of Marketing

results1
Results:

N. Kumar, Asst. Professor of Marketing

results 2
Results: 2

N. Kumar, Asst. Professor of Marketing

factor analysis basic concepts

X1

X2

X3

X4

F1

F2

Factor Analysis: Basic Concepts
  • Each original item (variable) is expressed as a linear combination of the underlying factors

Original

Items

Underlying

Factors

N. Kumar, Asst. Professor of Marketing

factor analysis basic concepts cont

Underlying

Factors

F1

F2

Original

Items

X1

X2

X3

X4

Factor Analysis: Basic Concepts (cont.)
  • Each Factor can be expressed as a linear combination of the original items (variables)

N. Kumar, Asst. Professor of Marketing

factor analysis basic concepts cont1
Factor Analysis: Basic Concepts (cont.)
  • Mathematical Model
  • Common Factors, F1, …, FM, can be expressed as linear combinations of the original variables, X1, …, XN
  • F1 = r11X1 + r12X2 + … + r1NXN
  • ……………………………………………..
  • ……………………………………………..
  • FM = rM1X1 + rM2X2 + … + rMNXN
  • rij = factor loading coefficient of the ith variable on the
  • jth factor

N. Kumar, Asst. Professor of Marketing

factor analysis basic concepts cont2
Factor Analysis: Basic Concepts (cont.)
  • Key Words
    • Factor Loading: Correlation of a factor with the original variable.
    • Communality: Variance of a variable summarized by the underlying factors
    • Eigenvalue (latent root): Sum of squares of loadings of each factor – just a measure of variance
    • e.g. the eigenvalue of factor 1, l1,
    • l1 = r112 + r122 + … + r1M2

N. Kumar, Asst. Professor of Marketing

factor analysis basic concepts cont3
Factor Analysis: Basic Concepts (cont.)
  • What does a Factor Analysis program do?
  • finds the factor loadings, ri1, ri2, … , riN, for each of the underlying factors , F1, …, FM, to “best explain” the pattern of interdependence among the original variables, X1, …, XN
  • How are Factor Loadings determined?
    • select the factor loadings, r11, r12, … , r1N, for the first factor so that Factor 1 “explains” the largest portion of the total variance
    • select the factor loadings, r21, r22, … , r2N, for the second factor so that Factor 2 “explains” the largest portion of the “residual” variance, subject to Factor 2 being orthogonal to Factor 1
    • so on ...

N. Kumar, Asst. Professor of Marketing

how many factors do you choose
How many Factors do you Choose?
  • Look at the Eigen Values of the Factors
  • If K of P factors have an eigen value > 1 then K factors will do a pretty good job
  • Scree plot helpful

N. Kumar, Asst. Professor of Marketing

scree plot selection of of factors

6

5

4

3

2

1

2 4 6 8 10

Scree Plot: Selection of # of Factors

“elbow”

N. Kumar, Asst. Professor of Marketing

factor analysis geometric interpretation
Factor Analysis:Geometric Interpretation

F1

Error

x1

F2

N. Kumar, Asst. Professor of Marketing

illustrative example measurement of department store image
Illustrative Example: Measurement of Department Store Image
  • Description of the Research Study:
    • To compare the images of 5 department stores in Chicago area -- Marshal Fields, Lord & Taylor, J.C. Penny, T.J. Maxx and Filene’s Basement
    • Focus Group studies revealed several words used by respondents to describe a department store
    • e.g. spacious/cluttered, convenient, decor, etc.
    • Survey questionnaire used to rate the department stores using 7 point scale

N. Kumar, Asst. Professor of Marketing

portion of items used to measure department store image
Portion of Items Used to Measure Department Store Image

N. Kumar, Asst. Professor of Marketing

department store image measurement input data
Department Store Image Measurement:Input Data

Respondents

… … …

Store 1

Store 2

Store 3

Store 4

Store 5

… … …

Attribute 1 … Attribute 10

N. Kumar, Asst. Professor of Marketing

pair wise correlations among the items used to measure department store image

X6

X7

X8

X9

X10

Pair-wise Correlations among the Items Used to Measure Department Store Image

X1

X2

X3

X4

X5

X1 1.00 0.79 0.41 0.26 0.12 0.89 0.87 0.37 0.32 0.18

X2 1.00 0.32 0.21 0.20 0.90 0.83 0.31 0.35 0.23

X3 1.00 0.80 0.76 0.34 0.40 0.82 0.78 0.72

X4 1.00 0.75 0.30 0.28 0.78 0.81 0.80

X5 1.00 0.11 0.23 0.74 0.77 0.83

X6 1.00 0.78 0.30 0.39 0.16

X7 1.00 0.29 0.26 0.17

X8 1.00 0.82 0.78

X9 1.00 0.77

X10 1.00

N. Kumar, Asst. Professor of Marketing

principal components analysis for the department store image data variance explained by each factor
Principal Components Analysis for the Department Store Image Data : Variance Explained by Each Factor

Factor Variance

(Latent Root) Explained

Factor 1 5.725

Factor 2 2.761

Factor 3 0.366

Factor 4 0.357

Factor 5 0.243

Factor 6 0.212

Factor 7 0.132

Factor 8 0.123

Factor 9 0.079

Factor 10 0.001

N. Kumar, Asst. Professor of Marketing

scree plot selection of of factors1

6

5

4

3

2

1

2 4 6 8 10

Scree Plot: Selection of # of Factors

“elbow”

N. Kumar, Asst. Professor of Marketing

unrotated factor loading matrix for department store image data using two factors
Unrotated Factor Loading Matrix for Department Store Image Data Using Two Factors

N. Kumar, Asst. Professor of Marketing

factor loading matrix for department store image data after rotation of the two using varimax
Factor Loading Matrix for Department Store Image Data after Rotation of the Two Using Varimax

N. Kumar, Asst. Professor of Marketing

procedure for conducting a factor analysis
Procedure for Conducting a Factor Analysis

Data Collection

Step 1

Run Factor Analysis

Step 2

Determine the Number of Factors

Step 3

N. Kumar, Asst. Professor of Marketing

procedure for conducting a factor analysis1
Procedure for Conducting a Factor Analysis

Step 4

Rotate Factors

Interpret Factors

Step 5

Calculate Factor

Score

Step 6

Do Other Stuff

Step 7

N. Kumar, Asst. Professor of Marketing

product differentiation positioning strategy
Product Differentiation & Positioning Strategy
  • Product Differentiation: creation of tangible or intangible differences on one or two key dimensions between a brand/product and its main competitors
    • Example: Toyota Corolla and Chevy Prizm are physically nearly identical cars and yet the Corolla is perceived to be superior to the Prizm
  • Product Positioning: set of strategies that firms develop and implement to ensure that these perceptual differences occupy a distinct and important position in customers’ minds
    • Example: KFC differentiates its chicken meal by using its unique blend of spices and cooking processes

N. Kumar, Asst. Professor of Marketing

product positioning perceptual maps
Product Positioning & Perceptual Maps
  • Information Needed for Positioning Strategy:
  • Understanding of the dimensions along which target customers perceive brands in a category and how these customers perceive our offering relative to competition
    • How do our customers (current or potential) view our brand?
    • Which brands do those customers perceive to be our closest competitors?
    • What product and company attributes seem to be most responsible for these perceived differences?
    • Competitive Market Structure
    • Assessment of how well or poorly our offerings are positioned in the market

N. Kumar, Asst. Professor of Marketing

product positioning perceptual maps cont
Product Positioning & Perceptual Maps (cont.)
  • Managerial Decisions & Action:
  • Critical elements of a differential strategy/action plan
    • What should we do to get our target customer segment(s) to perceive our offering as different?
    • Based on customer perceptions, which target segment(s) are most attractive?
    • How should we position our new product with respect to our existing products?
    • What product name is most closely associated with attributes our target segment perceives to be desirable
    • Perceptual Map facilitate differentiation & positioning decisions

N. Kumar, Asst. Professor of Marketing

application summary data reduction
Application Summary: Data Reduction
  • Identifying underlying dimensions, or FACTORS, that explain the correlation among a set of variables
  • e.g. a set of lifestyle statements may be used to measure the psychographic profiles of consumers

M < N

Psychographic

Factors

Statement 1

…………….

…………….

Statement N

Psychographic

Profiles

Life-style Statements

N. Kumar, Asst. Professor of Marketing

application summary product positioning introduction
Application Summary: Product Positioning/Introduction
  • Understanding customer preferences
  • What dimensions to differentiate on to be successful – implications for repositioning or introduction strategy

N. Kumar, Asst. Professor of Marketing

web advertising1
Web Advertising
  • Understanding the profile of customers
    • Conduct a survey
    • Analyze the data – extract the factors
    • Interpret the factors – score the customers
    • Can even draw a perceptual map of customers in the factor space

N. Kumar, Asst. Professor of Marketing

repositioning your web site1
Repositioning your Web Site
  • To learn of features that consumers value when browsing thro’ websites – conduct a survey
  • Factor analyze the data to uncover the underlying factors that influence customers’ preferences – interpret the factors
  • How score on these dimensions relative to your competition - perceptual map to help form the basis of your strategy

N. Kumar, Asst. Professor of Marketing