Conjoint analysis for luxury brand outlet malls in Korea with consideration of customer lifetime value

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Abstract

As Asian economies have grown rapidly, Asia has become a new leading market of the luxury goods industry. This paper used conjoint analysis (CA) for the optimal design of a luxury brand outlet mall to maximize the customer lifetime value (CLV). This approach complements a simple CA by considering CLV. The proposed approach is then applied to designing a suburban luxury brand outlet mall in Korea, a new concept to Korea. The results indicate that the optimal design for the outlet mall is the medieval European-style mall, with the linkage to Natural Tourism, which consists of the restaurants with delicious food and the stores with similar ratio between masstige and luxury brands.

Introduction

As the economy of Asian countries has grown rapidly, the market of luxury goods in Asia has also developed. Although Asian countries earn less per capita than developed countries in North America and Europe, this economic development has given more potential buying power to the Asian market. Recently, the Asian luxury goods market represents up to 45% of the world’s luxury goods market (Lee & Kim, 2003). Japan has already become an important market for the luxury item industry with Hong Kong and Korea following the trend. This economic growth also made various distribution channels possible in Asia allowing major distribution companies to introduce suburban luxury brand outlet malls in Asia. Luxury brand outlet malls began in the USA and Japan 10 years ago and have a large demand potential in Asia.

To successfully establish the market for new luxury brand outlet malls in Asia, it is essential to understand the customers’ preferences. Regardless of the specific tools and methods used to develop successful outlet malls, customer orientation is a prerequisite (Lengnick-Hall, 1996). There are two methods to discover customer needs, passive and active. The passive method simply classifies the existing customers. Alternatively, the active method finds customers who over their lifetime can be profitable for companies. By searching and sorting out valuable customers into different groups based on their potential lifetime profits, developers can better meet different needs and expectations (Day, 2003). Consequently, to the ability to evaluate the lifetime value of customers is important.

The main purpose of this study is to design a luxury brand outlet mall for the Asian market using a conjoint analysis (CA) in consideration of the customer lifetime value (CLV).

The remainder of this paper is organized as follows; Section 2 reviews previous studies regarding the luxury brand industry, shopping malls and the related research methodology for CA and CLV. In Section 3, a CA is conducted to design a luxury brand outlet mall in Korea. In Section 4, the CA results are enhanced with the CLV. In Section 5, the market share of a designed luxury brand outlet mall in a competitive environment using choice simulation is predicted. Section 6 concludes this paper and suggests future research directions.

Section snippets

Conjoint analysis and shopping mall design

Currently, shopping malls are operating in an increasingly competitive environment (LeHew & Fairhurst, 2000). Competition is strong due to the shopping center development boom that began in previous decades and continues today (Fickes, 1998).

In order to find ways to stay ahead of the competition, many prior studies have applied CA and CLV separately. CA has been used extensively by marketing researchers for understanding consumers’ preferences (Green & Srinivasan, 1978) and is a method for

Empirical study

In this empirical study, two methodologies are combined (CA and CLV) to design a successful luxury brand outlet mall in Korea based on the purchasing power of potential customers over their lifetime.

Computing potential purchasing power using CLV

Most CLV models stem from the basic equation defined as follows:CLV=∑i=1nRi-Ci(1+d)iwhere i is the period of cash flow from customer transactions, Ri is the revenue from the customer in period i, Ci is the total cost in period i, d is discount rate, and n is the total period of the expected life of the customer.

This basic model has been modified to meet our objectives. In this study, the customers are classified by their nationalities, and the potential purchasing power of each customer group

Choice simulation

Choice simulation is a method in which the market share among competitors can be predicted allowing companies to draw an optimal combination of attributes for a product (or service). That is, the technique that promises to deliver better decision-making insights for managers is choice-based conjoint analysis (Gates, McDaniel, & Braunsberger, 2000), the combination of CA and choice simulation. Although the utilities allow an understanding of the customers’ preferences, a combination with the

Conclusion

The CA is a popular method used to analyze customer utility before a new product or service is placed on the market. To develop a successful design for a luxury brand outlet mall, CA is applied with CLV.

The result of CLV shows that the purchasing power of the domestic customer is the highest (85%) follow by the Japanese (7%), Chinese (5%), and European and North American (3%). From CA, both the importance of each attribute and its preference level in luxury brand outlet malls are discovered.

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