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Karak Tea Whitener: The Use of Factor Analysis

Factor Analysis Introduction

In the modern digital world marketers have available to them huge amounts of data, not all of which is useful to them. The data needs to be summarized and pruned so that only the information most relevant to the decision at hand remains as large amounts of data might not only have irrelevant bits but might also be very difficult to manage. To summarize and reduce this data to a useful and manageable size marketers use a number of data reduction techniques, one of which is factor analysis. For example, a number of correlated variables might be affecting a decision to buy a particular product. Factor analysis determines and summarizes those variables into factor that most affect the decision to buy that product. This way marketers can only focus on those factors and come up with a better marketing strategy. The following section shows a stepwise guide to perform factor analysis using SPSS.

There are multiple techniques available for performing Factor Analysis, however, the one we will be using and the one most commonly used by statisticians in Principal Component Analysis or PCA. PCA allows us to reduce the number of input variables by dropping the least important variables from our dataset. Additionally, variables that show correlation with each other are bundled together into new variables, called factors. These new variables or factors are independent of one another. Factor Analysis uses a linear model to explain the variances therefore it is important that all the variables used are independent of one another i .

When to use PCA? ii

1. Do you want to reduce the number of variables, but aren’t able to identify variables to completely remove from consideration?

2. Do you want to ensure your variables are independent of one another?

3. Are you comfortable making your independent variables less interpretable?

Karak Tea Whitener - Steps to perform factor analysis

We will be using the example of Karak tea whitener for this exercise. See the problem below:

Seventeen psychographic statements were included in a questionnaire to know about the underlying dimensions of Karak Tea Whitener usage. In order to deduce a small number of components (factors) that can explain most of the variance in the seventeen psychographic statements, factor analysis was used as a means of data reduction. Factors identified at this stage will then be used in cluster analysis to develop segmentation. The following questions/variables will be used to run factor analysis:

1. Karak’s product advertising is a good source of learning and information about the product

2. Karak is a quality product

3. Karak is convenient to use

4. My parents have been using Karak since many years

5. Karak makes my tea more exciting

7.

I take the decision of buying Karak

8. I gave my family and friends advice to try Karak

9. I tend to refer to salespeople to get information about Karak

10. Promotions and coupons on Karak influences my buying

11. Karak is available at the reasonable price

12. I don’t make Karak purchase decisions based on advertising

13. I don’t need to change Karak, as I’m happy with my routine over the days

14. Karak is available as a low-calorie option

15. I pay attention to the nutritional information mentioned on Karak’s Packaging

Let’s help Karak conduct factor analysis to find out which variables are most important!

i. Open the Karak Tea Whitener Data in SPSS. You can download the file from here.

ii. Click Analyze followed by dimension reduction->Factor to open the factor analysis window.

reduction->Factor to open the factor analysis window. iii. Move our required variables (see above) to the

iii. Move our required variables (see above) to the Variables box as shown below.

to open the factor analysis window. iii. Move our required variables (see above) to the Variables

iv.

Click on the Descriptives button and check initial solution, reproduced 1 and KMO and Barlett’s test for sphericity iii2 and press continue. The dialogue box should look like this

and press continue. The dialogue box should look like this 1 The estimated correlation matrix from

1 The estimated correlation matrix from the factor solution. Residuals (difference between estimated and observed correlations) are also displayed. 2 The Kaiser-Meyer-Olkin Measure of Sampling Adequacy is a statistic that indicates the proportion of variance in your variables that might be caused by underlying factors. High values (close to 1.0) generally indicate that a factor analysis may be useful with your data. If the value is less than 0.50, the results of the factor analysis probably won't be very useful. Bartlett's test of sphericity tests the hypothesis that your correlation matrix is an identity matrix, which would indicate that your variables are unrelated and therefore unsuitable for structure detection. Small values (less than 0.05) of the significance level indicate that a factor analysis may be useful with your data.

v.

Click on the Extraction and select principle components as the method for running factor analysis. Also make sure that correlation matrix, unrotated factor solution and based on eigenvalues are checked. Press continue once your dialogue box looks like this

unrotated factor solution and based on eigenvalues are checked. Press continue once your dialogue box looks

vi.

Click Rotation and make sure that Varimax 3 and Rotated Solution 4 are checked before clicking continue.

Rotated Solution 4 are checked before clicking continue. vii. Click scores and make sure Display factor

vii. Click scores and make sure Display factor score coefficient matrix is checked before clicking continue.

coefficient matrix is checked before clicking continue. 3 An orthogonal rotation method that minimizes the number

3 An orthogonal rotation method that minimizes the number of variables that have high loadings on each factor. This method simplifies the interpretation of the factors. 4 A rotation method must be selected to obtain a rotated solution. For orthogonal rotations, the rotated pattern matrix and factor transformation matrix are displayed. For oblique rotations, the pattern, structure, and factor correlation matrices are displayed.

viii.

Click Options and check exclude cases listwise, sorted by size and suppress small coefficients. Select absolute value to be suppressed as 0.4 as shown below. However, based on the marketers discretion this value can be anything. 0.4, usually is a good number.

this value can be anything. 0.4, usually is a good number. ix. Press Ok at the

ix. Press Ok at the factor analysis window to run the analysis based on the specified parameters.

x. The KMO (greater than 0.6) and bartlett’s test (less than .05) indicate the factor analysis was significant and our factor analysis is useful.

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy.

.600

Bartlett's Test of Sphericity

Approx. Chi-Square

615.615

Df

105

Sig.

.000

xi. The total variance explained table indicates that 64.8% of the variance in respondents answers can be explained by the first 5 factors. Only factors with eigenvalues greater than 1 are selected for further analysis. The rotated components matrix has come up with a 5 factor solution for our problem. You can see which variables form part of which dimension in this table. For example factor 1 has 5 interdependent variables. You can see the variable names in the table.

dimension in this table. For example factor 1 has 5 interdependent variables. You can see the

xii. Although the initial or unrotated factor matrix indicates the relationship between the factors and individual variables, it seldom results in factors that can be interpreted, because the factors are correlated with many variables. Therefore, to get a better understanding of the factors the matrix is rotated. iv

Rotated Component Matrix a

Component

Component

1

S1-Karak’s product

advertising is a good source

.823

of learning and information

about the product

S3-Karak is convenient to

 

.745

use

S2-Karak is a quality

.661

product

S5-Karak makes my tea

.629

more exciting

S4-My parents have been

using Karak since many

.571

years

S6-I have some good

information about where

Karak is available

S7-I take the decision of

buying Karak

S8-I gave my family and

friends advice to try Karak

S15-I pay attention to the

nutritional information

mentioned on Karak’s

Packaging

S10-Promotions and

coupons on Karak

influences my buying

S11-Karak is available at

the reasonable price

S9 -I tend to refer to

salespeople to get

information about Karak

S12-I don’t make everyday

purchase decisions based

on advertising

S13-I don’t need to change

Karak, as I’m happy with my

routine over the days

S14-Karak is available as a

low-calorie option

4 5

2 3

.852

.674

.862

 

.407

.894

.855

.807

.411

 

.723

.681

.669

xiii. The interpretation of these factors is done on the basis the variables that are part of that factor and their respective weights. For example factor 1 could be about people who look for validation and proof when using a new product but prefer official sources as the source of that proof as the highest weight goes to people who look for information through advertisements.

i https://towardsdatascience.com/a-one-stop-shop-for-principal-component-analysis-5582fb7e0a9c

ii https://towardsdatascience.com/a-one-stop-shop-for-principal-component-analysis-5582fb7e0a9c

iii https://www.ibm.com/support/knowledgecenter/en/SSLVMB_sub/spss/tutorials/fac_telco_kmo_01.html

iv