What is Factor Analysis (And How Can Your Business Use It?)

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Factor analysis in marketing research essentially involves adjusting one marketing variable to see its impact on sales. The marketing strategy assists companies in determining which marketing initiatives are ideal and which ones to abandon.

Businesses can use factor analysis to streamline their data and comprehend the fundamental components influencing customer behavior, staff engagement, and other business outcomes. The concept outlines the most significant factors that explain the correlations between observable data.

It aids businesses in developing wiser decisions, more efficient treatment plans, and more focused marketing plans. This article will explain how factor analysis functions and how businesses can use it to gain an advantage in today’s data-driven business environment.

What is Factor Analysis?

Businesses use factor analysis, a statistical technique for finding underlying factors or latent variables contributing to the variance of the observed variables. The strategy identifies the fundamental components or theories that underlie the observed correlations between variables.

According to factor analysis, a few underlying factors are responsible for the observed correlations between the variables. Although these factors are not readily visible, they can be deduced from the variables. Factor analysis determines the strong connections between the observed variables and the underlying components.

Results include the factors required to adequately explain the observed data, the variables’ loadings on each factor, and the percentage of variance in the observed variables explained by each component. These findings can aid researchers in identifying the most crucial variables or theories that account for the observed variables.

These can also be incorporated into subsequent analyses or models to discover more about the relationships between the variables and other fascinating variables.

Generally, factor analysis is useful for minimizing the number of variables in a dataset and discovering underlying factors that may assist in explaining the connection variables.

Examining the Causes

When examining consumer satisfaction, a researcher will frequently utilize a survey to ask several questions about a product. These inquiries include the product’s attributes, ease of purchase, functionality, price, appearance, etc.

Often, they are measured using a numeric scale. Conversely, a researcher looks for the factors that contribute to customer satisfaction. Mostly, they are indirect measurements of the products’ psychological or emotional reactions.

Factor analysis indirectly employs the survey’s variables to determine the reactions. The researcher makes an assumption and reduces the variables to a few variables. Some of the methods for extracting these factors include:

Principal Component Analysis

This is the most popular method. It chooses the factor with the highest variance as the first one. The factor is then replaced with the variance after a few calculations. The process is then repeated until there are no more differences, using the next biggest difference to select the second factor.

Common Factor Analysis

This strategy differentiates the variables based on the most frequent differences. They do not account for variations in every variable.

Image Factoring

Variables are predicted using this method based on the correlation matrix and the OLS regression technique. The questionnaire score is linearly related to the components after identifying the variables. The strategy considers the error margin and all other factors in the equation.

Types of Factor Analysis

Two different types of factor analysis exist:

Exploratory Factor Analysis

By conducting exploratory factor analysis, the researcher makes no assumptions about the historical relationships between the factors. Every variable can be connected to any factor using this approach. This makes organizing the common variables and discovering intricate correlations between them easier.

Confirmatory Factor Analysis

Conversely, confirmatory factor analysis assumes variables are related to specific factors and uses well-established theory. It demonstrates the accuracy of the model’s predictions.

How Businesses Can Use Factor Analysis

Businesses use factor analysis to explain complex variables or data using the association matrix. It examines data interdependence and contends that complex variables can be reduced to a few essential ones.

This is conceivable because some variables and dimensions are related. One variable’s dimension may occasionally have an impact on another’s characteristic. The initial score is divided into parts using statistical techniques subsequently used to extract the information.

The Automobile Industry

Richard B. Darlington, a Cornell University professor, wrote a paper on applying factor analysis in the automotive sector in 1997. He discussed how research can be used to determine all the elements, such as size, price, options, and accessories, that influence the choice to purchase a car. The data is crucial in determining the important elements when considering a purchase. Car dealers can then modify their product offerings to suit the market.


Diversification is the secret to making money with your assets. Experts use factor analysis in investing to predict various industries and highlight potential red flags. The typical portfolio, for instance, contains stocks in industries like commodities and technology. Professional investors may select what to sell and hold onto by observing the rise in stock prices of connected companies.

Human Resources

Numerous factors influence a business’ hiring decisions. Human resource professionals can design a welcoming and effective workplace using data. Skill sets and contract or in-house expertise are optimal for improving the firm’s overall performance.


Factor analysis can help in creating a menu by analyzing the demographics. The number of rival businesses in the area, the clientele, demographics, and locations affect the success of factor analysis in businesses.


Using factor analysis is crucial for selecting teachers and developing school year plans. It comes in handy when determining the number of pupils in each classroom, the number of necessary teachers, payment distribution, and other factors crucial for a successful school year.

Using Factor Analysis

Factor analysis in marketing is an experimental technique that aids businesses in determining how to promote their products. Large-scale confirmation tests and examining how numerous variables interact are often necessary to reach a fair conclusion regarding the relationship between the variables. Having a market research specialist perform the factor analysis and review the test results is important.

Wrapping Up

Businesses need to employ factor analysis to maximize operations. It helps with examining factors like demographics and your target audience. You may develop the best channels and strategies by dissecting the key variables.

Simply, factor analysis eliminates uncertainty in budgeting, advertising, and employment. It is a practical instrument created after extensive market investigation and evaluation in any industry.

How Yurbi Can Help

We’re not going to over pitch, Yurbi doesn’t make factor analysis super simple. While Yurbi has the ability to do complex formulas and in many cases you can set up prompts to pass in values to parameters, to set up a true factor analysis and comparative review in Yurbi would take a lot of effort.

Where Yurbi does shine is in making it easy for you to pull the data you need from one or more data sources and export or integrate those into your factor analysis process. And then once you have results, Yurbi makes it easy to securely communicate those in the form of dashboards and reports to the stakeholders that need it.

Without a doubt, factor analysis is something you would need for your business to ensure that your daily operations would go on without a hitch. That’s why you need an impressive tool that can help you execute factor analysis smoothly and get your desired results after.

Yurbi also offers a reasonable pricing scheme perfect for small and medium-sized businesses that just want the best quality of business intelligence without ripping their banks open. We also offer free trials for prospective clients to see how they can help them with their businesses.

We know you are already excited, so here’s our offer: set up a meeting with us to discuss how Yurbi can help you with your business, or move up a notch and take advantage of our free live demo sessions.

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