Factor analysis is a process by which numerous variables are identified for a particular subject, such as why consumers buy cell phones. Factor analysis, after compiling all of the variables that go into a consumer's choice, then attempts to identify certain "factors" that are critical to the purchase, with the resulting factors being used in the marketing of cell phones. This same analysis could be used in virtual any business.
Insurance companies that issue automobile policies have to defend their policy holders when they are at fault in automobile accidents. One type of injury alleged to be caused by automobile accidents is closed head injuries. These injuries can prove to be very expensive to insurance companies, and the companies are using factor analysis as a way to mitigate the payments, according to Judith F. Tartaglia, an attorney who has co-authored a study on the factors that can be used by insurance companies. One factor is to establish that the head injury suffered was not caused by the accident, but was a pre-existing condition. Focusing on this factor can be of great benefit to the insurance company.
Outsource2India, an outsourcing solution company, gives a good example of the use of factor analysis by a financial institution in the business of home loans. Since there are so many options for a customer with good credit, factor analysis would comply the list of variables that determine which financial institution a customer would choose for his loan. After that list is finished, then the analysis would determine the relevant factors -- a smaller list -- that really determine choice. Once the financial institution reviews those factors, it could then proceed to market its products based on those factors.
In a 1997 article by Professor Emeritus Richard B. Darlington of Cornell University titled "Factor Analysis," the automotive industry was used as an example of a company that would benefit from factor analysis. A study would identify the many variables that go into the purchase of an automobile, from price, options, size, and many other items. The analysis would then condense the variables into a few factors that really determine the purchase. Once those factors have been identified, then the seller could tailor their marketing approach to those factors.
Robert Alley has been a freelance writer since 2008. He has covered a variety of subjects, including science and sports, for various websites. He has a Bachelor of Arts in economics from North Carolina State University and a Juris Doctor from the University of South Carolina.