Factor analysis

Factor analysis is a statistical technique that originated in mathematical psychology. It is used in the social sciences and in marketing, product management, operations research, and other applied sciences that deal with large quantities of data. The objective is to discover patterns among variations in the values of multiple variables. This is done by generating artificial dimensions (called factors) that correlate highly with the real variables.

Table of contents

1 Factor analysis in marketing

1.1 Information Collection
1.2 Analysis
1.3 Advantages
1.4 Disadvantages

Factor analysis in marketing

The basic steps are:

Identify the salient attributes consumers use to evaluate products in this category.
Use quantitative marketing research techniques (such as surveys) to collect data from a sample of potential customers concerning their ratings of all the product attributes.
Input the data into a statistical program and run the factor analysis procedure. The computer will yield a set of underlying attributes (or factors).
Use these factors to construct perceptual maps and other product positioning devices.

Information Collection

The data collection stage is usually done by marketing research professionals. Survey questions ask the respondant to rate a product from one to five (or 1 to 7, or 1 to 10) on a range of attributes. Anywhere from five to twenty attributes are chosen. They could include things like: ease of use, weight, accuracy, durability, colourfulness, price, or size. The attributes chosen will vary depending on the product being studed. The same question is asked about all the products in the study. The data for multiple products is codified and input into a statistical program such as SPSS or SAS.

Analysis

The analysis will isolate the underlying factors that explain the data. Factor analysis is an interdependence technique. The complete set of interdependent relationships are examined. There is no specification of either dependent variables, independent variables, or causality. Factor analysis assumes that all the rating data on different attributes can be reduced down to a few important dimensions. This reduction is possible because the attributes are related. The rating given to any one attribute is partially the result of the influence of other attributes. The statistical algorithm deconstructs the rating (called a raw score) into its various components, and reconstructs the partial scores into underlying factor scores. The degree of correlation between the initial raw score and the final factor score is called a factor loading. There are two approaches to factor analysis: "principle components analysis" (the total variance in the data is considered); and "common factor analysis" (the common variance is considered).

Advantages

both objective and subjective attributes can be used
it is fairly easy to do, inexpensive, and accurate
it is based on direct inputs from customers
there is flexibilty in naming and using dimensions

Disadvantages

usefulness depends on the researchers ability to develop a complete and accurate set of product attributes - If important attributes are missed the procedure is valueless.
naming of the factors can be difficult - multiple attributes can be highly correlated with no appearent reason.
factor analysis will always produce a pattern between variables, no matter how random.