External Effects

The factors evaluated in a conjoint analysis study usually focus on product attributes, ignoring other factors that affect market share. Consequently, the Market Simulator calculates a "preference share" rather than a "market share," emphasizing that important factors for calculating market share are missing from the model. Such missing factors include: the level and effectiveness of advertising, the size and effectiveness of the sales force, the number of outlets where the product is sold, the length of time the product has been on the market, and whether the product was first on the market.

The principal value of conjoint simulators is to indicate the kinds of changes that would make the most favorable differences in customer preferences. There is no real need for them to have the appearance of market shares. All the same, it is sometimes disconcerting for those viewing results to see shares of choice that are vastly different from known market shares.

The External Effect option of the Market Simulator helps to account for factors outside the model. When used properly, External Effects can lead to more realistic predictions. Even so, we recognize that the method used in our simulator to adjust for external effects is a simple approach with certain weaknesses. External Effects are introduced into the Market Simulator by applying a multiplicative External Effects factor to each product's preference share. The factor ranges from 0 to 9999. A value of 1 introduces no effect, a value greater than 1 increases a product's preference share above what the model would otherwise predict, a value less than 1 decreases the predicted preference below this value, and a value of 0 eliminates the product from the model.

You set External Effect factors from the Scenario Specification dialog, by checking Apply External Effects. When the Apply External Effects box is checked, an additional column in the product specification grid appears (at the far right) in which you can type external effects.

Setting the factor for each product is subjective. The following procedure minimizes the level of subjectivity:

1.

Start by running a simulation on products currently on the market for which market shares are known or can be estimated. Set the External Effects factor to 1 for all products in this simulation.

2.

Divide the actual market share for each product by the preference share predicted by the model. This number becomes the External Effects factor for that product.

3.

Re-run the Market Simulator with these factors applied. Check that the results now reproduce the actual market shares for the products.

4.

Set the External Effects factor for new products, using the External Effects factor for the current products as benchmarks. A new product should have an External Effects factor close to the ones for similar existing products (similar with respect to the "missing" factors listed above).

5.

The Market Simulator produces shares that new products are expected to achieve when they have fully penetrated the market. The External Effects factor can be used to estimate shares before full penetration is achieved. One way to do this is to estimate, from past experience, the extent to which new products have reached full penetration at a time t after their introduction. When you want a simulation for time t, multiply this penetration factor by the one you have calculated using the steps above, and use this result as the External Effects factor.

For example, suppose you are a car manufacturer and you are introducing a new sedan. And suppose from your past sales you know the following penetration rate (fraction of expected monthly sales) for a sedan:

Months After Introduction

Time                0    3    6    9    12   15   18

Market Penetration  0.05 0.20 0.50 0.80 0.90 0.95 1.00

Then, if the External Effects factor at full market penetration is expected to be 1.2, the External Effects factor used as a function of time t would be:

Months After Introduction

Time                0    3    6    9    12   15   18

Market Penetration  0.06 0.24 0.60 0.96 1.08 1.14 1.20

As a final note, if you do need to apply external effect factors, we suggest you first investigate tuning the Exponent to best fit target shares prior to invoking external effect adjustments.