Conjoint Case. - Forte Hotel Design - MKTG 490 Prof. Conor Henderson. February 22, 2014 by Stefan Doeblitz
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1 Conjoint Case - Forte Hotel Design - MKTG 490 Prof. Conor Henderson February 22, 2014 by Stefan Doeblitz
2 New Hotel Chain Fort Inn Executives, a U.K. hotel chain, plans to enter the U.S. market with a new hotel chain partly to serve business travelers from Europe to the U.S. To European customers, Forte trusts on name recognition and association with comfort and service. To American guests, Forte wants to offer expected full functionality in addition to extra services that other mid-priced hotels lack. The hotels will be priced around $100 per night and located near suburban centers. Statistics and Research The most important factors in a traveler s hotel search are price, location, and brand name. Men, who account 60% of business travelers in the U.S., value price, location, and convenience the most. Businesswomen are more concerned about safety and cleanliness. These points of emphasis are very important in choosing a hotel for the very first time. At least 30% of business travelers care about unique hotel attributes, which are crucial for encouraging guests to return again. Half of all European business guests expect to relax and be looked after. The other half likes to be provided with an environment that allows them to finish their work. Conjoint Analysis Forte Executives Inn decided to differentiate for the following attributes: 1) Room type 2) Business amenities 3) Leisure facilities 4) Conveniences and extras 5) Restaurants and dining The study included 300 business travelers and 40 responses are used to find best combination of attributes. 1. Advantages and limitations of describing products as bundles of attribute options This study does not simply find out how attributes are rated on a separate and individual case. Instead, respondents provide insight on how we can best combine certain options. This may save us some costs: we do not need to offer the best option in every category, as it may not be relevant to customers when considering an overall package. Choices can be limited when considering a specific amount of attributes and number options within an attribute. In this analysis, it is important to consider whether the attributes are mutually exclusive and whether they could be more creative. The conjoint analysis provides very good insight into the customer preferences on the choices they are asked about; nevertheless, this type of study does not consider other attributes customers might prefer. Therefore, it is crucial to understand what is relevant in creating the study design. For instance, the study needs to consider the attributes that competitors are offering. If the study provides the same choice of attributes, then the prediction of future market share is more accurate. Additionally, the choice of attributes offered need to be realistic and attainable. If competitors aren t offering the same attribute, because it is unrealistic to actually achieve it, then the study will turn out to be inaccurate. Lastly, some qualitative research in determining the most appropriate choice of attributes is very important. The study should only ask for preferences of options that are most relevant to the respondents. For instance, asking business travelers for a preference on being provided with a three-hour sightseeing tour would be irrelevant. Nevertheless, asking for their preference on a complimentary airport shuttle (group bus, cab, or limousine) may have been a very relevant option of convenience & extra services for business travelers.
3 2. Interpret your own preferences on the resulting Part Worths Sheet. Were there any surprises? Do you think the right attributes and levels were included in the bundle options? What changes might you make if you were to design this conjoint study for the Forte brand in this particular market? First of all, I may not be the target audience for this study; although I am from Europe, I am not a frequent business traveler to the U.S. and probably have differing expectations of the hotel offerings. My preferences are not surprising to me. I did not care much for having an office room. Consequently, my choice was between a small and a large room, and I gave a bundled option a higher preference whenever it had a large room instead of a small one. Nevertheless, the numbers (4 and 10) correctly reflect that room type wasn t most relevant to me. The one amenity I valued the highest was Internet access. I overlooked the other two options most of the time. Still, this attribute was still not very relevant in my choice of bundles. The most important factor for me was the leisure time accommodations. I am a sports guy and value exercise; consequently, any option that offered an exercise facility received my attention. Because I cared about exercise but not about pool, I gave the same value to rooms that included either only exercise or both. If the room did not offer exercise options, I did not care for it. Because my bundle preference was very much determined by this attribute, all other attributes seemed rather secondary. The extras did not matter much to me. Lastly, I choose a bundle that offered restaurant delivery over a bundled that did not offer this option whenever I could. For the most part, I believe the bundle options offered a good mix between business-related and leisure options. I think room choices are well-designed. The findings determine whether customers prefer to have a work area or rather an extra bed in the room. As it was seen in my case, someone who cares about only pool or exercise will give the same value to an option that includes only that preference or both of them. I rated exercise as well as exercise+pool similarly high, because I only cared about exercise to be included. Lastly, providing a less complex question of providing restaurant delivery may become ineffective. As respondents see the options yes or no, they might just quickly pick one or the other as they progress in their responses. Study participants will give more thought to the complex choices and lose focus on the restaurant attribute. I believe exercise options should all be differentiated; they could have been exercise, pool, mini-golf. The study would have revealed a more accurate finding in terms of what customers really prefer. Furthermore, as I briefly mentioned in the introduction, an attribute that may be relevant to business travelers is transportation. For example, respondents could have been asked to choose between airport transportation, hotel <--> conference area transportation, hotel <--> night-out transportation.
4 3. Comment on the respondents partworths matrix (Are there any interesting trends or unique segments?). The average ratings of the 40 respondents was very low for every category. Furthermore, the average ratings were also very similar to each other. Because no major differentiation can be made, it is difficult to initially find any attribute levels that seem more impacting than others.
5 4. Assess the viability of the four specific hotel concepts that Forte is exploring for the State College area. The base cost to build each hotel room (without the attributes and options listed in Exhibit 3) is expected to be about $40,000 for a 150- to 200-room hotel, regardless of the mix of room types. What about this industry and this particular market makes considering costs in addition to the estimates of each product concept s potential to capture market share important for this particular hotel? When focusing on the revenue potential, the following levels have the largest negative contribution: Fruit & Cheese Bowl, Exercise + Pool, and Pool. The best financial impact has No Restaurant Delivery. The following are the incremental fixed costs as well as the contribution margin for each bundle: - Professional 1 : $4,100 / room contribution margin: (-$1.5) / room / day - Professional 2 : $2,500 / room contribution margin: (-$0.5) / room / day - Tourist : $4,000 / room contribution margin: (-$0.5) / room / day - Deluxe : $6,400 / room contribution margin: (-$2.5) / room / day The difference of $2 in contribution margin for a room that is priced at $100 per night represents a 2% difference. Obviously, on a large quantity 150 to 200 rooms, such a margin of per day and per room will show different effects. For instance, a margin of (-0.5) and (-2.5) for 200 rooms in one year results in a difference of $146,000. Financially, the most inefficient type is Deluxe, which has the highest fixed cost and lowest contribution margin. In the hotel industry, price is the most crucial factor for customers in deciding which hotel to visit for the first time. This suggests that Forte does not have much flexibility in pricing and any option that may seem pampering but financially stressful will be difficult to implement. Looking at the table, the best option financially is Professional 2, followed by Tourist. Professional 1 has a similar fixed cost per room as Tourist, but a lower contribution margin. Nevertheless, when introducing a new hotel chain, the success of the bundles also depends on the comparison to competitors. Most competitors offer newspaper but no fruit & cheese bowl or Internet access. The majority of offers speaker phones and exercise+pool. Also, the room office, shoe shine, and tape library are only offered by one competitor each. Therefore, Forte has an opportunity to capture customers that are not being served to.
6 5. Identify the optimal product concept from among the four Forte is currently considering. Explain how you arrived at your recommendation. Do you have any creative ideas that may be useful for Forte to consider in the design of the hotel? How might they have gathered such creative input before designing their study? First-Choice Rule Share of Preference Rule Logit Rule The circles highlight the best two options in terms of market share and revenues in all three different choice rules. In the evaluation, we need to consider the financial impact of each room type, the product differentiation to each competitor, and the fact that exact market shares have not been provided in the beginning of the study. All choice rules but the alpha rule have been employed in order to see the different effects on market share and revenue. The alpha rule is inappropriate because market shares of hotel chains were unknown. Most business travelers already have experience abroad and a clear set of expectations; consequently, the First- Choice Rule and Shared Preference Rule will be most appropriate in this case. The Logit Rule would not be used in a matter where customers carefully research and evaluate their experience. 4 th choice Deluxe offers Internet access and tape library as differentiators, but makes no sense financially. It has the lowest market shares and revenues in any choice rule consideration. Although it offers great attributes and seems attractive to customers demanding comfort and service, this room type is a financial risk.
7 3 rd choice The Tourist room differs from competitor Atherton Hilton only in offering an exercise room plus pool instead of just an exercise room. In my case, when a person just cares about the exercise room (whether it is combined with pool or not), this may not make a big difference. This room type achieves the highest market share and revenue when we use the First-Choice Rule. This means, that our customers would use this room as their first choice every time and never consider anything else. In any other choice rule, it seems to be competitive in terms of revenue as the professional room types, but achieves lower predicted market share. 2 nd choice Professional 2 has the lowest fixed cost to be established and the highest contribution margin. This reduces the time for the hotel to break even dramatically. This room type allows for the highest market share if customers do not have a very clear first option that the always stick to. If we base our analysis on the First-Choice rule, though, this room type does not perform well. Although this option is optimal if we consider the financial limitations and customer uncertainty about establishing a new hotel chain, Professional 2 does not offer a compelling difference for Forte Executives Inn from the competitors in the long run. The room includes fax and tape library, which only one competitor in each category offer as well. Those competitors also offer larger rooms with it, though; consequently, if a customer is looking for these extras but not a large room, then this option seems great. Nevertheless, that is the only advantage this room and it still needs to compete on its attributes. 1 st choice Taking all the considerations into account, Professional 1 will be the best room type for Forte Executive Inns in the long-run. This room has the same fixed set up cost as tourist, but a lower contribution margin. This may delay the time it takes to break-even. Nevertheless, this room type is clearly differentiated from all the competitors; it offers attribute levels that nobody in the market is competing on yet. Professional 1 has a room office (only offered by one competitor [Scanticon]) and an exercise room. Although it does not provide restaurant deliver (which is financially desirable for the hotel), this is the only room in the market that provides Internet access and/or a complimentary fruit & cheese bowl. Professional 1 is not only offering one attribute, but two attributes that none of the competitors is offering. Around this competitive advantage, Forte Inn Executives can build a brand in the United States to succeed. It can create a strong demand of this product and sell this room type as the one and only to its appropriate customers. Eventually, prices may be raised if the perceived value has increased accordingly, and the financial aspect of this room type can be optimized. In all of the different choice rules considered in the market share & revenue analysis, this room type was the best or second best bundle to choose. Especially if customers have one very preferred choice of room type, Professional 1 will achieve the highest market share and revenue together with Tourist. Nevertheless, the differentiation from competitors and its long-run benefits make this a better option.
8 6. Would you recommend product concepts other than the four Forte is considering for the State College market? Explain how you arrived at your recommendation(s). Again, the First-Choice rule and Share of Preference Rule are most appropriate in the case of customers carefully researching and evaluating their stay in a hotel. Therefore, these two choice rules are used to find other optimal product bundles. All of the options offer a pool only, which none of previous product suggestions or competitors has. Before deciding for any of these options we need to be careful. Maybe the exercise room seems to be important to majority or all of business travelers. A deeper analysis to see if only a pool will be attractive enough is required.
9 Optimal product 1 offers a small room put customers get pampered (e.g. restaurant delivery). This room type offers a speaker phone (like all competitors), but also a fruit & cheese bowl (like none of the competitors). This option is financially not the best, because it has a fruit & cheese bowl and restaurant delivery, which add high fixed costs and lower contribution margins. Optimal product 1 has the highest market share and weighted revenue when using First-Choice Rule. Nevertheless, it has lowest unit revenue. When using the Share of Preference Rule, it has similar market share and weighted revenue as all other optimal product options. This room type really focuses on the one who wants the service and not the business traveler who needs to finish projects. It has an added incremental fixed cost of $3,400 per room but an average expected incremental contribution per day per room o (-$3). This is a lower contribution compared to the previous four options. Although the fixed cost is not very high, in the long-run, this option will be financially worse because of the lower contribution. Optimal Product 2 actually has the highest revenue (over 100) when basing the analysis on First-Choice Rule It offers a room office (like only one other competitor), room fax (like only one other competitor), and shoe shine (like only one other competitor). The incremental fixed cost per room is only $3,230. Even more importantly, this option has the highest average expected incremental contribution per day per room of (+$0.5) out of any option consider thus far. This could be promising in the long run. Nevertheless, that one other competitor who is offering the same (or even better) attributes is Scanticon. They actually offer an exercise room as well as a pool and they also offer restaurant delivery service on top of all that. Again, we need to find out how important the exercise room is and if only the pool is attractive enough. Here, we also need to find out the pricing of Scanticon and see if some customers are willing to switch to a cheaper room when sacrificing the exercise room and restaurant delivery service. I believe options 1 and 2 both seem feasible. Option 1 addresses the business traveler who wants to relax, while option 2 is made for the one who needs to finish work. Financially, option 2 is safer, but it is too similar (and less pampering) to the offerings of competitor Scanticon. Option 1 may achieve the highest market share and also offers a differentiated service (fruit & cheese bowl), but it may be a financial risk. Although the market shares would be higher for the optimal product options when using the First-Choice Rule, this rule may not be the most appropriate one for hotel offerings. This will be explained in question 7. The market shares of the optimal product options are similar the Forte s four options when using other choice rules. Consequently, the Professional 1 is still the best concept I would recommend for an implementation.
10 7. What are the major limitations and strengths of this conjoint analysis? Comment on the appropriateness of using such an analysis for this particular industry and market. In all of our analyses, the Share of Preference may be more appropriate, because only 30% of business travelers value attributes, which lead to a return of guests. This means, many travelers are fine with taking their second or maybe even third choice at times. This is why throughout most of the analysis, the Share of Preference Rule was considered at a higher level than the other rules. Some major strengths of this conjoint analysis include: - Initial financial prediction of each bundle We can evaluate and compare our bundles on financial aspects - Good attribute selections - Preference data: although the average ratings were very similar for each attribute level, this analysis provided for specific bundles - Competitor analysis: The new profile bundles were easily comparable to competitor bundles (on non-price competitive terms only, though) Some major weaknesses/limitations of this conjoint analysis include: - Only 30% of business travelers care about attributes How much value can we really put on this analysis to make crucial decisions? - Only 40 answers of only 300 respondents were used The hotel is going to have 200 rooms; how representative will this sample really be? - Price is not an attribute being measured! Price is the most important factor when choosing a hotel for the first time; how can we attract enough of the right customers to come to a brand new hotel when we did not analyze a preferred price? - Unclear what the target audience is There is a difference between European and U.S. customers; which one does Forte really want to target?
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