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J PROD INNOV MANAG

1991;8:189-202

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0000

Product Design Strategies for Target-Market Positioning


Paul E. Green and Abba M. Krieger

Designing optimal positioning strategies for target segments has become an area of intense research interest over the past few years. This article examines a variety of strategies that can be
operationalized from conjoint analysis input
data. Paul Green and Abba Krieger discuss strategies for modifying buyer perceptions, ideal-level
preferences and attribute importances that are
attractive for a firm's existing brand(s). They
then consider longer run strategies for modifying
the current brand's attribute levels and develop a
case to illustrate applications of the techniques.

Address correspondence to Paul E. Green, S.S. Kresge Professor of Marketing, Marketing Department, Suite 1400, The Wharton
School, University of Pennsylvania, Steinberg-Dietrich Hall, Philadelphia, PA 19104-6371.
1991 Elsevier Science Publishing Co., Inc.
655 Avenue of the Americas, New York, NY 10010

Introduction
Few marketers would dispute the central roles
that product positioning and market segmentation
play in today's economies, national or global.
The last decade has witnessed a surge of new
methodological and modeling developments for
optimal positioning. Reviews of these developments are provided by Green, Carroll and Goldberg [2], Sen [9], Sudharshan, May and Shocker
[12], Kohli and Krishnamurti [7], Sudharshan,
May and Gruca [11], and Green and Krieger [3].
Conjoint analysis [4] has been central in the
implementation of many optimal positioning
models. The advent of user-friendly personal
computer packages, such as those of Herman [5],
Johnson [6], and, most recently, SPSS [10], has
served both to define the state of conjoint practice and to make the methodology accessible to
wider audiences.
Helpful as they are, however, commercial conjoint packages focus largely on data collection
and part-worth estimation. While all three of the
packages cited above contain buyer choice simulators, none deals with product optimization and
related issues.
The purpose of the current article is to discuss
various extensions of current product positioning
practice. As in the case with commercial packages, the methodology described here collects
conjoint preferences and respondent background
data. Attribute-level perceptions data for each respondent's most preferred brand are also collected. (Perceptions data collection represents a
departure from the commercial packages' input
0737-6782/91/$3.50

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BIOGRAPHICAL SKETCHES
Paul E. Green is the S.S. Kresge professor of marketing at
the Wharton School, University of Pennsylvania. Dr. Green's research emphasizes quantitative methods and new measurement techniques in market analysis and consumer research. He has been honored for this research by the American Marketing Association, the
American Statistical Association, the American Psychological Association, the Market Research Society, and the Association for Consumer Research.
Dr. Green is the author or coauthor of several books, including the
widely used text Research for Marketing Decisions, now in its fifth
edition. He is also a prolific contributor to marketing and business
journals.
Abba M. Krieger is professor of statistics and operations research at the Wharton School, University of Pennsylvania. He is the
author or coauthor of articles in statistical methodology and the interface between statistical methodology and optimization theory. His
current research interests include theoretical and empirical analyses
of the bootstrap resampling technique and application of statistical
methods and operations research to problems in marketing research.

requirements; otherwise, the models we describe


use the same kinds of data that are routinely collected in industry-based conjoint studies.)
Our approach deemphasizes the methodology's mathematics in favor of a more managerial
slant that focuses on strategic questions. We use
a case format that considers a hypothetical firm,
the Epsilon Company, that is in the consumer
credit card business. While all attribute level descriptions, cost data, product profiles, and background variables are disguised, the case nonetheless has been designed to be realistic in terms of
the kinds of strategic research questions that are
raised in this industry.
Study B a c k g r o u n d
As described in Fortune magazine [8], the credit
card industry is feeling the heat of new competitors, most notably Sears' Discover Card and,
even more recently, AT&T's Universal Card.
Some major players, such as Citibank, are also
raising the ante by buying out credit card portfolios of smaller financial institutions; it is believed
that Citibank paid the equivalent of $268 per account (one of the highest prices ever), for its purchase of Bank of New England's card portfolio.
Credit card companies are also adding new
consumer benefits (e.g., retail purchase insurance), cashback bonuses (e.g., the Discover
Card) and other features in the battle for market

P . E . GREEN AND A. M. KRIEGER

share. With new customers getting ever harder to


corral, attempts are being made to extend card
usage to such establishments as fast foods, movies, and even toll booths.
In the case described here, Epsilon is a relatively small player in a group of competitors that
include Alpha, Beta, Gamma, and Delta. Alpha
and Gamma are the giants in the field (with market shares of 28% and 45%, respectively). EpsiIon's share is only 10%.
Short Run Strategies
Epsilon's management is concerned with both
short run and longer run competitive strategies.
In terms of short run strategy, the following questions are relevant:
1. Are the characteristics of Epsilon's card profile being misperceived by its current users? If
so, how can it improve its position by focusing
on those particular card attributes where the
correction of misperceptions is most advantageous?
2. Is it possible to change current card users'
preferences for various profile levels that favor Epsilon's offering? If so, what gains might
be associated with moving all card users' ideal
levels closer to the specific levels provided by
Epsilon's card?
3. What are the current strengths and weaknesses of Epsilon's card? Which attribute saliences (i.e., perceived attribute importances)
should be stressed in order to increase the
share/profits of its current product?
It should be noted that all three sets of questions involve actions that could be taken with no
change in the current card's actual attribute levels. Rather the intent (through advertising) is to
modify consumers' perceptions, ideal levels, or
attribute saliences in ways that are differentially
favorable to Epsilon. Of course, the consequences of the actions (particularly changing card
holders' ideal attribute levels) may be very long
in coming, if at all.
Longer-Run Strategies
In contrast, changes in Epsilon's product offering, including features, user benefits, and price
are typically longer term; even changing the
card's price (annual billing) takes time. In terms

PRODUCT DESIGN STRATEGIES FOR POSITIONING

of the longer run, the following questions are relevant:


1. Assuming that the current Epsilon card's attribute levels and price could be changed,
what is the optimal bundle of features/benefits/price to be offered, conditional on competitors' current profiles?
2. Assuming that Epsilon could introduce a line
extension (a new card in addition to its current
card), what should the new card's profile be?
3. Next, assume that Epsilon does, in fact, introduce the r e c o m m e n d e d line extension. Beta
observes this event and decides to retaliate by
replacing its current card with a new profile.
What should Beta's new card be?
Note that the preceding strategies make various assumptions about competitive behavior. In
the first two questions we do not take up the issue
of competitive retaliation but do consider Epsilon's competitive draw and cannibalization. In
the third question, however, we consider the case
in which Beta responds to the initial line extension m o v e of Epsilon.

Target Marketing
Up to this point we have been assuming that Epsilon's product positioning strategy is based on
total market considerations. We now focus on
product design for selected target segments. The
following questions are appropriate:
1. We first assume that Epsilon m a n a g e m e n t
wishes to consider a line extension for a preselected target segment. What should this card's
profile be?
2. We next assume that Epsilon wishes to choose
two target segments and replace its current
card with two new cards, one for each segment. What should their profiles be?
The preceding product positioning and target
marketing actions are only illustrative of the possibilities for which the proposed methodology is
designed. T h e y should be sufficient, however, for
illustrating the versatility of the approach.

The Survey
Epsilon researchers next designed and implemented a national survey of credit card holders,

J PROD INNOV M A N A G
1991 ;8:189-202

191

using a telephone-mail-telephone interviewing


procedure [4]. A total of 480 respondents, all of
w h o m used at least 1 of the 5 credit cards, completed the interviews. The interview employed a
hybrid conjoint procedure [1] and consisted of 12
attributes (Table 1). In addition to the conjoint
data, information was also obtained on respondents' perceptions of the attribute levels of their
most preferred card; this was done by simply asking them to pick the attribute levels (Table 1) that
most closely matched their perceptions of the features of their most preferred card. R e s p o n d e n t
background information on card usage, travel,
and selected demographics was also obtained.
For background purposes, Figure 1 shows
part-worth summaries for each of the 12 attributes. As might be expected, the services are such
that the more enhanced levels are preferred to the
more basic levels that, in turn, are preferred to no
services at all.

Cost Data
Obtaining Epsilon's cost data at the attribute
level was a m u c h more difficult job. Our interest
was restricted to variable costs only; even at that,
crude estimates had to suffice. Each of the " n u l l "
or base levels (lowest part-worth levels) was
coded at zero cost, and costs of enhanced levels
were expressed as (negative) departures from this
base. Annual price was translated into annual
gross revenue for the base profile; costs for enhancements were deducted from their revenue
estimates.
The results of these estimation procedures provided Epsilon researchers with an annual contribution to overhead and profit, estimated on a percard level. (The contribution includes estimated
interest charges.)

Current Competitive Profiles


Based on published data, each competitor (Alpha
through Epsilon) was profiled in terms of its
" t r u e " attribute levels. These profiles are shown
in Table 2, along with industry-based current
market shares for each of the five cards.
We note that Alpha's offering is a " p r e s t i g e "
c a r d - - h i g h e s t priced of all competitors, with enhanced levels of most service attributes and with
no end-of-year cash rebate. Beta's offering em-

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P . E . G R E E N AND A. M. K R I E G E R

Table 1. Card Attribute Levels Used in Conjont Survey


Annual price

$0

$10

$20

$50

$80

$100

Cash rebate (end-of-year, on total purchases)


none

1/2%

1%

800 number for message forwarding


none

9-5pm weekdays

24 hours per day

Retail purchase insurance


none

90 days coverage

Common carrier insurance (death, injury)


none
$50,000
$200,000
Rental car insurance (fire, theft, collision, vandalism)
none
$30,000
Baggage insurance (covers both carry-on and checked)
none
$2,500 depreciated cost
$2,500 replacement cost
Airport club admission (based on small entrance fee)
no admission
$5/visit
$2/visit
Card acceptance
air, hotel, rental cars; AHC and most restaurants; AHCR and most general retailers (AHCRG); AHCR and department
stores only (AHCRD)
Twenty-four hour medical/legal referral network
no
yes
Airport limousine to city destination
not offered
available at 20% discount
800 number for emergency car service
not offered
available at 20% discount

Figure 1. Average part-worth values from hybrid model

Scale
Values

0.50.4-

$~""~ *'o

0.3-

0.2-

0.1-

~S0

J1%
None 12%

,~..~ ~ - ,

, , ,
Price

Rebate

~4hr~
Nolle 9-5prn

~ i '~,
Message
Forwarding

,$~k~200k
ays No~ne
l

Purchase
Insurance

Carrier
Insurance

2
1

I
Car
Insurance

0.50.4-

Ye~

0.3-

AHCRG

~"~CRD

0.2-

/el

/,

0.1

,
Baggage
Insurance

Airport
Clubs

,
Acceptance

Medical/
Legal

Yu

Limousine

/,

Emergency
Car Service

PRODUCT DESIGN STRATEGIES FOR POSITIONING

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193

Table 2. Card Profiles of Five Competitors

Attribute
Price
Cash rebate
Message forwarding
Retail purchase insurance
Common carrier insurance
Rental car insurance
Baggage insurance
Airport clubs
Acceptance
Medical/legal
Airport
Limousine
Emergency car serv.
Current mkt. share

Alpha

Beta

Gamma

Delta

Epsilon

$80
none
9-5
weekdays
90 days
$200,000
$30,000
$2,500
rep.
none
AHCRG
yes
yes
20% disc.
yes
20% disc.
28%

$20
none

$20
none
24 hours
daily
none
$50,000
none
$2,500
dep.
$2/visit
AHCRD
yes
yes
20% disc.
yes
20% disc.
45%

$0
0.5%

$10
none
9-5
weekdays
90 days
none
none

none
90 days
$200,000
$30,000
$2,500
rep.
none
AHCRD
no
none
none
8%

phasizes insurance c o v e r a g e (where it is head-tohead with Alpha but is m o r e m o d e s t l y priced).


G a m m a ' s offering is priced the same as Beta's
but its profile emphasizes c o n s u m e r a m e n i t i e s - message forwarding, airport clubs, medical/legal,
airport limousine, and e m e r g e n c y car service.
Delta is a " b a r g a i n - b a s e m e n t " e n t r y - - n o annual costs plus a small rebate on cumulative annual purchases. It offers v e r y few services and
has s o m e w h a t less limited a c c e p t a n c e than the
others. Epsilon's price is less than Alpha's, Beta's and G a m m a ' s but it offers both limited
amenities and limited insurance services.
As n o t e d in the last row o f Table 2, the bigger
players are Alpha and G a m m a ; Beta's, Delta's
and Epsilon's shares are roughly equal to each
other and c o n s i d e r a b l y below those of the big
two.

Buyer Choice Rule


The individual c o u n t e r p a r t s to the averaged partworths o f Figure 1, along with the profile descriptions o f Table 2, are typically e n t e r e d into a conjoint choice simulator. The r e s e a r c h e r is then
faced with the p r o b l e m o f what choice rule to use.
T h e r e are three choice rules currently in use in
c o m m e r c i a l conjoint packages: (1) the max utility choice rule; (2) the logit choice rule; and (3)
the B r a d l e y - T e r r y - L u c e (share o f utility) rule.

none
90 days
none
none
none
none
AHCR
no
yes
20% disc.
yes
20% disc.
9%

none
$5/visit
AHCRD
yes
none
none
10%

E a c h o f these rules can be mimicked by what we


call the alpha rule. S o m e w h a t m o r e formally, assume that any specified supplier's profile can be
r e p r e s e n t e d by a v e c t o r js; s -- 1, 2 . . . . .
S.
Given individual k's v e c t o r o f part-worths, we
can c o m p u t e
Uk.s = Uk(js)

(1)

as the utility of individual k for supplier s. The


" m a r k e t s h a r e " (or probability o f k choosing supplier s) is
~'k,~ =

U~ (Js)
s
E U~ (Js)

(2)

S=I

w h e r e the e x p o n e n t a is c h o s e n to be non-negative.
As alpha a p p r o a c h e s infinity the preceding
choice rule mimics the m a x utility rule. Smaller
values o f alpha can mimic a logit rule. If alpha is
set to 1.0, we have the B r a d l e y - T e r r y - L u c e rule.
A c o m p u t e r program, called A L P H , has been
designed to find the value of alpha that, if applied
to e a c h individual's utilities, obtains the closest
overall fit to actual m a r k e t shares for each supplier. Exhibit 1 provides a brief description o f the
program. W h e n applied to the current survey
data, the best fitting value o f alpha was 10.4. This
is the value used in all s u b s e q u e n t analyses.

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P.E. GREEN AND A. M. KRIEGER

Exhibit 1. Characteristics of Computer Programs Used in Case Study


Program

Input

What the program does

Output

ALPH

Each individual's utilities for


the profile of each supplier
Actual market share for each
supplier
Individual's importance
weight file

Solves for optimal value of


alpha which, if applied at the
individual level, best
reproduces actual market
shares
Solves for implied predictions
of user-supplied alpha values
Uses four alternative
algorithms in solving for
optimal alpha value

Optimal value of alpha


Predictions of shares for
user-supplier alpha values

PERCEPT

E a c h individual's current
brand identification
Individual's importance
weight file
Individual's part-worths file
Individual's demograhics file
Individual's perception vector
for current brand

Finds s u m m a r y , by brands, of
incidence of each perceived
attribute level and associated
average part-worth
C o m p u t e s sensitivity of
average part-worths as
perceived levels become
increasingly similar to
targeted levels
Can analyze data for the
overall profile, subsets of
attributes, or individual
attribute perception changes
Analysis can be performed at
total-market or by selected
demographic level

Size of demograhic s e g m e n t
Relative incidence of brands
within s e g m e n t
Associated brand utility
changes as perceptions
approach targeted levels
Sensitivity analysis by
individual attributes
S u m m a r y tables of
misperceptions, by attribute
and supplier

IDEAL

Individual part-worths file


Targeted levels for the ideal
profile
Interpolating constant:
probability of changing
current ideal to targeted ideal

If r e s p o n d e n t ' s ideal level


already agrees with target, no
change is made
If current ideal does not equal
target, targeted level is
increased proportionately
toward current ideal, based on
user-supplied interpolation
value

N e w matrix of individual
partworths
This n e w file is then
p r o c e s s e d by S I M O P T for
c o m p a r i s o n with original
partworths file

SALIENCE

Individual attribute
importances and
attribute-level desirabilities
Individual importance weight
file
Demographic (background)
file
Current market shares of all
suppliers
E a c h supplier's profile
Value of alpha and
demographic attribute weights
Attribute level cost/return
data

Program shows, attribute by


attribute, how share/return for
a selected supplier changes as
greater importance is
associated with the attribute
Program c o m p u t e s optimal
distribution of effort and new
set of importance weights that
maximize selected supplier's
share/return
Analysis can be done at the
overall market or selected
demographic level
Program also allows u s e r to
read in efforts and obtain their
implied returns

N e w set of attribute
importances
Predicted share/return if n e w
importances are u s e d
N e w part-worth matrix with
modified importance weights
for input to S I M O P T or
conventional simulators

PRODUCT DESIGN STRATEGIES FOR POSITIONING

Exhibit 1.

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195

(continued)

Program

Input

What the program does

Output

SIMOPT

Individual part-worths file


Individual's importance
weight file
Demographics (background)
file
Current market shares for all
suppliers
Each supplier's profile
Value of alpha and
demographic attribute weights
Control parameters for
optimization
Attribute-level cost/return
data

For any set of competitive


profiles, the program
computes share/return for
each supplier,
All shares/returns are
automatically adjusted to
base-case conditions
Sensitivity analyses can be
performed at the individual
attribute level
Optimization can be carried
out by supplier or for groups
of suppliers; attribute levels
can be fixed for conditional
optimization
Analyses can be conducted at
the total market or selected
target segment level

Market share/return for each


supplier
Individual supplier selection
file
Optimal product description
for total market or selected
segment
Sensitivity analysis results, by
level within attribute

SEGUE

Individual part-worths file


Individual's importance
weight file
Demographics (background)
file
Segment attribute weights

For any target segment


composable from the
background variables (with
weights supplied by the user),
the program computes size of
segment, ideal levels, attribute
importances, and attribute
level desirabilities
Both additive and conjunctive
segments can be created
The user can also input any
trial product profile and find
its total utility compared to
the best profile
A respondent weights file is
prepared for later use in
SIMOPT

Attribute importance, level


desirabilities, and ideal levels,
by selected segment
Profile utilities by selected
segment
Respondent weights file
summarizing each individual's
relevance to the target
segment (input to SIMOPT)

Short Range Strategies

3. Change consumers' perceived attribute importances in ways that increase the relative attractiveness of the firm's product.

Changing actual product attribute levels may take


some time to accomplish and is associated with
both technical and market uncertainty regarding
successful implementation. In the short run the
firm may elect to maintain its current product and
attempt to:

Modifying Consumers' Perceptions

l. Correct consumers' misperceptions of its attribute levels.


2. Modify consumers' attribute level preferences
in ways favorable to the product.

The PERCEPT program (Exhibit 1) has been designed to examine consumers' perceptions of
product attribute levels for their current (or most
preferred) brand and to find those attributes that

We discuss each of these actions, in turn.

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P.E. GREEN AND A. M. KRIEGER

Table 3. Summary of Probabilities of Correct Perceptions of Alpha, Gamma and Epsilon

Alpha
Gamma
Epsilon
Mean

.58
.84
.93
.78

.76
.64
.76
.72

.53
.63
.66
.61

.75
.70
.87
.77

.82
.60
.73
.72

Attributes
6
7
.73
.67
.95
.78

.90
.82
.90
.87

10

11

12

Mean

.50
.73
.90
.71

,73
.53
.80
.69

.57
.67
.78
.67

.69
.66
.88
,74

.92
.91
.80
.88

.71
.70
.83

Comparative Average Utility gains for Correcting Misperceptions:


Alpha
Gamma
Epsilon

9.8%
10.8
7.8

Best Attributes for Epsilon


Attributes 9 (card acceptance) and 10 (medical/legal network)

offer the greatest gains in utility for moving perceptions to the " c o r r e c t " levels of the firm's
brand. Input data consist of each respondent's
multiple choice data representing the level within
each attribute that is perceived to match most
closely the consumer's perception of his/her current brand.
PERCEPT plays two roles. First, it provides
summary descriptions, by brand, of consumer
perceptions versus "reality" levels. In this way,
one can compare brand efficiencies with regard to
how one's advertising messages are getting
across. Alternatively, one can compare attributes
(across brands) in terms of the accuracy with
which their levels are perceived.
Second, PERCEPT can be used to examine the
differential attractiveness of correcting consumer
misperceptions, so that the firm can focus on
those attribute levels that carry the highest payoff
in consumer utility (and, other things being equal,
brand choice). For illustrative purposes, we select three of the five suppliers: Alpha, Gamma
and Epsilon. Table 3 summarizes the results.
We first note that, on average, Epsilon users
show the highest incidence of accurate perceptions; 83% of the time they correctly perceive the
levels of Epsilon's true profile. This compares to
71% for Alpha and 70% for Gamma. In all three
cases, however, the perceived modal profiles corresponded to the true profiles of each supplier.
We also note from Table 3 that, on average, attribute 12 (emergency card service) and attribute
7 (baggage insurance) were most often perceived
correctly, while attribute 3 (message forwarding)
was least often perceived correctly.

In addition, Table 3 indicates that the achievement of perfect agreement between true and perceived attribute levels would increase average
utilities by only 8-11%. We also note that the two
most attractive attributes for Epsilon to work on
are card acceptance and medical/legal network.
These two attributes alone count for almost all of
Epsilon's potential utility increase of 7.8%.
All in all, we conclude that perceptions are reasonably accurate, particularly for Epsilon. Moreover, the gain in average supplier utility for correcting misperceptions is relatively small
(8-11%). Finally, if Epsilon's advertising emphasizes its breadth of acceptance and availability of
medical/legal services, utility gains could be
forthcoming in the future. Finally, it is worth noting that none of the commercial conjoint packages deals with the analysis of perceptions data.
Their simulators all assume that each consumer
correctly perceives each supplier's profile, as defined by the program's user.

Changing Ideal Attribute Levels


In the same spirit we can examine the sensitivity
of Epsilon's market share/return if modifications
(through advertising, packaging, etc.) could be
made to consumers' ideal (most preferred) attribute levels. For example, suppose a consumer currently does not care for either retail purchase insurance or medical/legal referral services.
Suppose Epsilon could induce consumers to
modify their current ideal levels (obtained from
their part-worths) to agree with its card's current
levels. What would be the impact of this change?

PRODUCTDESIGNSTRATEGIESFOR POSITIONING

J PRODINNOVMANAG
1991;8:189-202

I
20

i
60

I
40

Alpha

Gamma

Alpha

Gamma

80

I I~"

197

Base case conditions

100

IEpslln

IDEAL with P=0.5

t~"

IDEAL with P = 0.15

Alpha

III

Gamma

I
Figure 2. Stacked bar chart showing
market share changes related to various
strategies (total market)

Gamma

Alpha

IV

~"

(~*

Replacement for
denoted ~ *

~**

Addition to ~ ,
denoted (~**

(~,

/~

Alpha

Gamma

~"

Alpha

VI
0

i /~*
20

More realistically, suppose that one could


move consumers' current ideal levels to a set of
prespecified target levels with a 50% probability.
What would be the result on Epsilon's share/return? The I D E A L program (Exhibit 1) implements this objective. This program solves for a
new matrix of part-worths for the total sample of
respondents (not just Epsilon preferred users)
that reflects a user-supplied probability of movement from current to targeted ideal levels.
Illustratively, we first choose a probability of
0.5 of moving each respondent's vector of ideal
attribute levels from their current values to those
of the targeted Epsilon profile (Table 2). Having
done this, we use a computer choice simulator
(with an alpha choice rule of a = 10.4) to find a
new set of market shares. Figure 2 shows the
results.
The first stacked bar chart of Figure 2 shows
the initial market shares (Table 2). The second
stacked bar chart shows the effect on shares obtained from application of the I D E A L program,
with P = 0.5. As noted, Epsilon's share increases

Gamma
410

~"
60

(~

**

80

Replacement for ~,
denoted~*

100

from 10% to 31%. Of course, a probability of 0.5


is still unrealistic.
A more conservative value of P = 0.15 was
tried next. The third bar chart shows an increase
in Epsilon's share of 14% (versus the base case
share of 10%). This is much more realistic. In a
similar manner, other values of P could be tried
to get some feel for the sensitivity of Epsilon's
share to this type of part-worth change.

Changing Attribute Importances


The third avenue for redirecting Epsilon advertising is changing consumers' evaluations of attribute importances. The optimization procedure employed in this strategy is considerabl); more
complex. To carry out this strategy we apply an
algorithm called S A L I E N C E (Exhibit 1).
The principal inputs to S A L I E N C E consist of
attribute desirabilities, attribute importances
(both obtained from a hybrid conjoint model),
competitive profiles (shown in Table 2), and the
alpha exponent (10.4, in this example). SALI-

198

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E N C E contains a non-linear optimization routine


that finds a new set of importance weights for
maximizing Epsilon's share/return.
In this example we first use S A L I E N C E to
identify those attributes where Epsilon has a differential advantage over one or more competit o r s - t h a t is, where an increase in the salience of
the attribute produces a higher return for Epsilon,
other things remaining equal. Only five attributes:
Price
Card acceptance
Message forwarding
Medical/legal referral network
Retail purchase insurance
met this condition.
Next, we applied the optimization routine that
finds the best allocation of new advertising effort
across the five candidate attributes. The algorithm indicated that new (incremental) advertising effort should be allocated across only two of
the five attributes: price and the medical/legal referral system.
Under the current situation respondents'
judged importances of the attributes, price and
medical/legal, were 17.3% and 9.6% out of a total
of 100%. Under the optimized allocation of new
effort these importances should expand to 40.0%
and 20.8%, respectively, out of a total of 100%.
These two attributes constitute its principal "leverage" attributes.
Some Caveats

All three of the preceding algorithms, PERCEPT,


IDEAL, and S A L I E N C E are essentially sensitivity analysis approaches. They do not tell us how
we should go about implementing the desired
changes, how likely we will be able to accomplish
the task, and what the effort will cost. Rather,
they forecast the stakes (or payoffs) if the task
can be accomplished. If the payoff is relatively
small (as was the case for PERCEPT), the manager may elect to disregard the strategy. On the
other hand, a large potential payoff could justify
further study of the means and associated costs of

P . E . G R E E N AND A. M. KRIEGER

pursuing the strategic objective. Of course, further study would also consider additional factors
related to payoff estimation and cost outlays.

Longer Range Strategies


We now turn to longer range strategies available
to Epsilon. Illustratively, we first consider various strategies in the context of the total market.
Then we describe counterpart strategies at the
target market level.
Optimal Product Design

The SIMOPT program (Exhibit 1) is the algorithm


that we use for finding optimal product profiles in
the context of competitive offerings. SIMOPT [3]
is a conjoint-based algorithm that solves for an
attribute-level configuration that optimizes share/
return for a specified supplier. It uses the alpha
choice rule (set at 10.4 in this example) and a
divide-and-conquer heuristic that breaks down
the overall optimization task into subset problems that are then solved iteratively. Like most
heuristics, however, optimization is not guaranteed. Fortunately, if the number of possible attribute-level combination is less than a million,
SIMOPT utilizes a complete enumeration routine. (In the sample problem there only 186,624
combinations.)
In the present problem we first solve for the
" b e s t " (in the sense of maximizing contribution
to overhead and profits) product profile for EpsiIon, given the specified profiles (Table 2) of its
competitors. Initial shares for all five competitors
appear in the bar chart of panel I of Figure 2.
Epsilon's current share is 10%.
Panel IV of Figure 2 shows that the best replacement (denoted e*) for Epsilon's current
product results in an increase in Epsilon's share
to 22%. Its associated contribution to overhead/
profit increases 82% over that of the base case.l
Table 4 shows the changes that take place in optimizing Epsilon's contribution. Note that Epsilon
moves to a high price, along with a cash rebate,
increased insurance coverage, inexpensive access to airport clubs, and emergency car service.

t F o r r e a s o n s o f c o r p o r a t e c o n f i d e n t i a l i t y , w e a r e u n a b l e to report actual profit contributions.

PRODUCT DESIGN STRATEGIES FOR POSITIONING

J PROD INNOV M A N A G
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199

Table 4. New Card Profiles Associated with Alternative Strategies

Current epsilon
Price
Cash Rebate
Message Forwarding
Retail Purchase Insurance
Common Carrier Insurance
Rental Car Insurance
Baggage Insurance
Airport Clubs
Acceptance
Medical/legal
Airport Limousine
Emergency Car
Service

$10
none
9-5 weekdays
90 days
none
none
none
$5/visit
AHCRD
yes
none
none

In all, half of the original 12 attribute levels are


changed.
What happens if we keep the present Epsilon
card and add a line extension (denoted e**). SIMOPT solves for the optimal extension and,
somewhat surprisingly, it turns out to be the same
profile as e*. Panel V of Figure 2 shows that the
combined share o f e and e** is 8% + 21% = 29%.
Thus, the loss due to cannibalism is only two percentage points. Most of the business picked up by
e** is from competitive products. Moreover, the
overhead/profit contribution for the combined offerings (e and e**) is 38% higher than the contribution of e* as a replacement for e. Hence, assuming that the costs of adding the line extension
are not excessive it is better in this instance to
line extend than to replace e.
Suppose Epsilon does, in fact, add the new
product e** to its line. The Beta Company observes this event and notes (panel V in Figure 2)
that its share decreases slightly from 8% to 7%.
Beta considers the prospect of replacing its current card with a new profile--one that optimizes
its contribution, conditional on the changes that
Epsilon has already made.
Panel VI shows that Beta's best retaliatory
move increases its share from 7% to 18%. EpsiIon's combined share decreases by only two percentage points. Most of Beta's new business
comes at the expense of Gamma. Table 4 shows
that Beta's replacement profile involves eight attribute changes. (Illustratively, this optimization
was carried out, conditional on Beta's price and
cash rebate policy remaining unchanged.)

Replaced or
extended
epsilon
$100
1%
9-5 weekdays
90 days
$200,000
none
$2,500 dep
$2/visit
AHCRD
yes
none
yes
(20% disc)

Current beta

Replacement
beta

$20
none
none
90 days
$200,000
$30,000
$2,500 rep
none
AHCRD
no
none

$20
none
9-5 weekdays
none
$200,000
none
$2,500 dep
$2/visit
AHC
yes
none
yes
(20% disc)

none

Some Caveats
Although SIMOPT is a very flexible algorithm for
finding optimal product positionings, it should be
borne in mind that the mechanism underlying the
model does not consider the gestation period over
which share changes take place. SIMOPT also
takes into consideration existing products' shares
and an opportunity to optimize, conditional on
some attribute levels remaining fixed; however, it
does not explicitly deal with the costs of product
proliferation and the possible dynamic actions
that competitors might take even before new
products are introduced. Thus, in practice, forecast conditions might never be reached, due to a
variety of market factors not under the firm's
control.
Finally, the SIMOPT model assumes that consumers' part-worths remain stable over the planning horizon, that all relevant attributes appear in
the model, that costs are accurately measured at
the attribute level, and that each firm enjoys a
rough parity with respect to advertising and distribution levels. Clearly, these are important assumptions; their recognition underscores the
need to consider SIMOPT (and our approach in
general) as a set of planning models whose outputs need to be checked against other independent information sources and management judgment.

Target Market Product Design


Up to this point all of our analytical excursions
have entailed the total market. We now consider

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P . E . GREEN AND A. M. K R I E G E R

Table 5. New Card Profiles Associated with Target-Market Product Positioning

Price
Cash Rebate
Message Forwarding
Retail Purchase Insurance
Common Carrier Insurance
Rental Car Insurance
Baggage Insurance
Airport Clubs
Acceptance
Medical/legal
Airport
Limousine
Emergency Car
Service

Current epsilon

Up-scale market

$10
none
9-5 weekdays
90 days
none
none
none
$5/visit
AHCRD
yes

$100
none
24 hours/day
90 days
$200,000
$30,000
$2,500 rep
$2/visit
AHCRG
yes
yes
(20% disc)
yes
(20% disc)

none
none

various strategies that can be directed towards


specific target segments, selected by the researcher. Survey data were available for several
background attributes:
Income level (moderate, higher, highest)
Psychographic clusters (four groups)
Travel frequencies (low, high)
Gender (male, female)
Multiple card use (low, high).
We use a program, called S E G U E (Exhibit 1),
for forming various target segments from these
building blocks. After the segment is formed respondents are differentially weighted by their resemblance to the target. We can then use SIMOPT to find optimal replacement or extension
products for the target segment.
Illustratively, assume that Epsilon management is interested in a target segment that entails
one or more of the following categories:
Highest income
Male
High travel frequency
Heavy user of multiple credit cards.

Psychographic
segment 1

Psychographic
segment 2

$100
none
24 hours/day
90 days
$200,000
$30,000
$2,500 rep
$2/visit
AHCRD
yes

$80
none
9-5 weekdays
none
$50,000
$30,000
$2,500 rep
$5/visit
AHC
yes

none
yes
(20% disc)

none
none

Management weights the attributes with values of


3, 2, 1, and l, respectively. An individual who
respects all four categories receives the highest
weight (viz, a weight of 7). Individuals who fall
into none of the categories receive a zero weight,
and so on. (As it turned out, 384 out of 480 respondents fell into at least one of the four categories shown above.)
S E G U E first prepares a respondent weights
file that summarizes the target segment specifications. SIMOPT is then run to find the best line
extension that would appeal to this segment,
given that the parent product, Epsilon, remained
in the line.
The column labeled up-scale market in Table 5
shows the best profile for the target segment just
selected. As noted, this profile represents a major
shift (9 out of 12 attributes) from the current Epsilon card. Market share for Epsilon in the up-scale
segment increases almost 40% with the addition
of this card.
Next, we consider two of the four groups obtained from the psychographic clustering. Group
1 was identified as active travelers, socially oriented, and gregarious, while group 2 was characterized as active travelers, but less extroverted
and socially oriented. There were 121 respondents in group 1 and 105 respondents in group 2.
We used SIMOPT to find the optimal profile for
each of these two psychographic segments.
The columns labeled Psychographic Segments
1 and 2, respectively, show the optimal product

PRODUCT DESIGN STRATEGIES FOR POSITIONING

profiles for each cluster. Both profiles differ


markedly from the current Epsilon card. We also
note that the first target segment is very close to
the up-scale segment (described above). Psychographic segment 2 shows less interest in some of
the amenities and less concern with wider card
acceptance (in restaurants and department
stores). Market shares increase 30% over the current Epsilon card share in these two psychographic segments.
Other target segments could also be selected
by the user and various weights could be applied
to attributes, and levels within attributes, to reflect target market size attractiveness, cohesiveness, reachability, and compatibility with current
Epsilon offerings. In short, the combination of
target market selection and product optimization
within target provides Epsilon with flexibility for
designing specialized products for segment
needs, on either a replacement or line extension
basis.
Conclusions
By way of a case example, we have tried to illustrate how conjoint input data (and respondent attribute level perceptions) can be analyzed from a
variety of viewpoints, entailing both short term
strategies (maintaining the current offering's profile) and longer term strategies (changing the current offering's profile). Emphasis centered on optimal product design and target market selection.
The heart of the proposed system is the
SIMOPT model for product design and segmentation. The model considers:
1. Market share and/or profit-return optimization
2. Total market and/or individual segment forecasts
3. Sensitivity analysis as well as optimal profile
seeking
4. Cannibalization issues related to product complementarity and line extension strategies
5. Calibration of results to existing market conditions
6. Constrained optimization, through fixing selected attribute levels for any or all suppliers
7. A decision parameter (alpha) that can be used
to mimic any of the principal conjoint choice
rules (max utility, logit, BTL)
8. Sequential competitive moves, such as line extensions or competitor actions/reactions.

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201

Like any model, SIMOPT no doubt will be modified and extended as further information about its
performance and user reception is obtained. Still,
the model provides an example of how current
conjoint-based simulators can be extended well
beyond their traditional applications to estimating
market shares for a few user-selected profiles.

Concluding Caveats
Throughout, we have also discussed various caveats in the use of the proposed techniques, such
as difficulties in modeling the time trends over
which various predicted outcomes take place, the
possible omission of important product attributes, and various aspects of competitive retaliation.
Many of these limitations stem from the reliability/validity of conjoint input itself. 2 Green and
Srinivasan [4] stress the importance of conjoint
validation experiments and report some recent
findings at the academic and industry levels.
As simulators (and optimizers) routinely yield
market share forecasts, there is always the danger of spurious precision. Our own experience
supports the value of using calibration (e.g., current) market shares, as is done in the SIMOPT
model. The model's forecasts are then anchored
to these base levels, so that the researcher is, in
effect, reporting relative (rather than absolute)
levels.
We also need ways to insure that all important
attributes are measured, that costs can be accurately estimated at the attribute level, that marketing mix variables (e.g., distribution levels) can
be accommodated, and that dynamic competitive
effects can be estimated and included in the
models. Clearly, there is much work left to be
done.
T h e a u t h o r s w o u l d like to a c k n o w l e d g e s u p p o r t o f the Citib a n k F e l l o w s h i p f r o m the Sol C. S n i d e r E n t r e p r e n e u r i a l
C e n t e r a n d the S E I C e n t e r for A d v a n c e d Studies in M a n a g e m e n t , b o t h at t h e W h a r t o n School.

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