Factor Analysis

By Rama Krishna Kompella

Factor Analysis

• Factor analysis is a multivariate statistical technique that is used to summarize the information contained in a large number of variables into a smaller number of subsets or factors.

• The purpose of factor analysis is to simplify the data. • With factor analysis there is no distinction between

dependent and independent variables; rather, all variables under investigation are analyzed together to identify underlying factors

Applications of Factor Analysis• Advertising. Factor analysis can be used to better understand

media habits of various customers.• Pricing. Factor analysis can help identify the characteristics of

price-sensitive and prestige-sensitive customers.• Product. Factor analysis can be used to identify brand

attributes that influence consumer choice.• Distribution. Factor analysis can be employed to better

understand channel selection criteria among distribution channel members.

• For example, suppose that a bank asked a large number of questions about a given branch. Consider how the following characteristics might be more parsimoniously represented by just a few constructs (factors).

Advantages of Factor Analysis

- Benefits include: (1) a more concise representation of the marketing situation and hence communication may be enhanced; (2) fewer questions may be required on future surveys; and, (3) perceptual maps become feasible. - Ideally, interval data (e.g., a rating on a 7 point scale), regarding the perceptions of consumers are required regarding a number of features, such as those noted above for the bank are gathered.

Questions?