﻿ What Is a Market Simulation?

What Is a Market Simulation?

A conjoint/choice study leads to a set of utilities (part-worths) that quantify respondents' preferences for each level of each attribute.  These part-worths can be analyzed in a number of ways.  You can examine each respondent's part-worths (but this task could become overwhelming).  You might summarize the average part-worth utilities, or compute average importances. You could create graphs and charts to display that information, but to many it might seem somewhat abstract and difficult to grasp.  Examining average responses could also fail to detect important segments of the market that have unique and targetable preferences.

A good market simulator (also known as a choice simulator) is like having all of your respondents gathered in one room for the sole purpose of voting on product concepts and competitive scenarios (defined in terms of the attribute levels you measured) you show them.  You walk into the room, show them a market scenario (i.e. products A, B and C),  and they vote for the one(s) they prefer.  Millions of potential products and market situations could be evaluated, and your captive audience would never get tired, ask for lunch breaks, or require you to pay them by the hour.

How does a market simulator work?  Let's suppose we had a way (such as through conjoint or choice analysis) to quantify how much people liked the different qualities of ice cream cones.  Let's refer to those preferences as part-worth utilities, and assume the following values for a given respondent:

 Utility Chocolate 0 Vanilla 30 Strawberry 40 \$0.60 50 \$0.80 25 \$1.00 0

Using those utility values, we could predict how he would choose between a vanilla cone for \$0.80 or a strawberry cone for \$1.00.

 Vanilla (30 utiles) + \$0.80 (25 utiles) =  55 utiles Strawberry (40 utiles) + \$1.00 (0 utiles) =  40 utiles

We'd predict he would prefer the vanilla cone.  If we had data for 500 respondents, we could count the number of times each of the two cones was preferred, and compute a "Share of Preference," also referred to as a "Share of Choice":

 Share of Choice Vanilla @ \$0.80 300/500 = 0.60 Strawberry @ \$1.00 200/500 = 0.40

In our hypothetical market simulation, 60% of the respondents preferred the vanilla, and 40% the strawberry cone.  This illustrates the most simple simulation approach, referred to as the First Choice model.