Comparing Two-Stage Segmentation Methods for Choice Data with a One-Stage Latent Class Choice Analysis

Abstract

Market segmentation is a key concept in marketing research. Identification of consumer segments helps in setting up and improving a marketing strategy. Hence, the need is to improve existing methods and to develop new segmentation methods. We introduce two new consumer indicators that can be used as segmentation basis in two-stage methods, the forces and the dfbetas. Both bases express a subject’s effect on the aggregate estimates of the parameters in a conditional logit model. Further, individual-level estimates, obtained by either estimating a conditional logit model for each individual separately with maximum likelihood or by hierarchical Bayes (HB) estimation of a mixed logit choice model, and the respondents’ raw choices are also used as segmentation basis. In the second stage of the methods the bases are classified into segments with cluster analysis or latent class models. All methods are applied to choice data because of the increasing popularity of choice experiments to analyze choice behavior. To verify whether two-stage segmentation methods can compete with a one-stage approach, a latent class choice model is estimated as well. A simulation study reveals the superiority of the two-stage method that clusters the HB estimates and the one-stage latent class choice model. Additionally, very good results are obtained for two-stage latent class cluster analysis of the choices as well as for the two-stage methods clustering the forces, the dfbetas and the choices.

Keywords:

• Choice-based conjoint data
• Conditional logit model
• Latent class model
• Market segmentation
• Mixed logit model
• Segmentation methods

Mathematics Subject Classification:

• 62P20, 91B08, 91B10

Acknowledgments

The authors would like to thank John Sall for his inspiring ideas and useful comments. This work was supported by DBOF/08/014 of the Research Council of the KU Leuven.