Factor Analysis and Cluster Analysis

Submitted by : Akshay Patidar

Factor Analysis

Factor analysis allows us to look at groups of variables that tend to be correlated to each other and identify underlying dimensions that explain these correlations.
William D. Neal, Senior partner, SDR consultancy

Factor analysis is also called as exploratory factor analysis (EFA) This technique has numerous implications in marketing research as:

Can be used in market segmentation for ex: buying new car. Can be employed to determine brand attributes that influence customer choice for ex: toothpaste

The main goal of factor analysis is data reduction. A typical use of factor analysis is in survey research, where a researcher wishes to represent a number of questions with a smaller number of factors

Two questions in factor analysis:

How many factors are there and what they represent (interpretation)

Two technical aids:

Eigen values Percentage of variance accounted for

More on terminology

Factor loading: interpreted as the correlation between the variable and the factor Communality: the proportion of variability for a given variable that is explained by the factor Extraction: the process by which the factors are determined from a large set of variables

The sample size should be about 10 to 15 times of the number of variables.

Theoretical basis

In factor analysis each variable is expressed as a linear combination of underlying factors. If the variables are standardized, the variables of factor model may be represented as :
V1=L1*F1+E1 V2=L2*F1+E2

Number of factors:
Eigen values are often used to determine how many factors to take Take as many factors there are having Eigen values >1
Eigen value represents the amount of standardized variance in the variable accounted for by a factor The sum of Eigen values is the percentage of variance accounted for

Conducting Factor Analysis

Criticisms of Factor Analysis

Labels of factors can be arbitrary or lack scientific basis Garbage in, garbage out really a criticism of input variables Too many steps that could affect results Too complicated

Cluster analysis

Cluster analysis helps in identifying groups or segments that are more like each other than they are like members of other groups or segments.

It examines the interdependent relationships between the whole set of variables rather than making distinction between dependent and independent variables as in factor analysis.

Also called as classification analysis or numerical taxonomy. Used to classify objects or cases into relatively homogenous groups called clusters. Used in marketing for: Segmenting the market Understanding buying behavior Identifying new product opportunities Selecting test markets

Conducting cluster analysis

Source and references

Marketing research- Naresh k. Malhotra

Research methodology- C.R.Kothari

Marketing research- C.N.Sontakki

Thank You and Keep smiling