What is the Gabor-Granger pricing method?
The Gabor-Granger pricing technique is defined as a pricing question used in survey research to determine the price elasticity of products and services.
“Pricing is a pretty simple and straightforward thing. Customers will not pay a penny more than the true value of the product”, said Ron Johnson, CEO of JC Penny at the time.
Determining the price for a product or service is an essential step and one of the most critical decisions for any organization. Companies aren’t charities and thereby need to cover costs. It is imperative to price a product right that it finds buyers but also covers costs. Finding your customers’ willingness to pay for services or products is considered the main reason for market research. What value do your consumers put on your products is the main question that needs answering. A standard method to understand this is to expose people to a price and then ask if people would buy it or not—a technique commonly known as Gabor-Granger, which we will uncover in this article.
How does the Gabor-Granger method work?
Gabor-Granger is a pricing research technique for determining a revenue and demand curve for a specific product or service. The method involves asking potential customers the likelihood of their purchasing a product or service at different price points.
Respondents are shown different prices and asked about their likelihood of purchase at each of the prices shown. This enables us to plot a revenue and demand curve to determine the optimum price to deliver the maximum revenue.
It helps to provide a short description of your product (e.g., an image of the product listing all the features or specifications). The model shows the user a product or a package and asks, ‘Would you buy product Y at X price’. If the user says no, the next lower price point is shown; if the user says yes, then a higher price point is displayed. This process repeats until the pricing model identifies an optimal price point.
The Gabor-Granger pricing technique helps to answer the following two critical questions for an organization:
- Can you increase the price of products or offerings without it drastically affecting sales?
- At what price points does it become obvious that the consumer’s willingness and ability to pay for said products or services, increases or decreases?
When can and should you use the Gabor Granger pricing model?
Developed by two economists, André Gabor and Clive Granger, Gabor-Granger has been in use since the 1960s. This method is particularly useful when:
- You want to get a directionally correct price estimate for willingness to pay for your product or service
- You have an established price range that needs an optimization
- You want to find revenue-optimizing price points. Note that a revenue-optimum price point may be different from a profit optimum price point
- When all the other components of the product or service are fixed and cannot be changed
- You want to determine how the change in price might affect demand elasticity
- You only want to look at your brand without considering the competition
Gabor-Granger Questionnaire for Survey Research
In QuestionPro, you can add the Gabor-Granger question type from the pricing analysis section under advanced questions. Gabor-Granger can be used as a separate study with demographic questions or clubbed with other pricing questions like Conjoint analysis, Van Westendorp, MaxDiff analysis, which can supplement the Gabor-Granger with a different take on pricing.
We provide users with complete freedom to set up the questionnaire in the research design phase. You can choose the manual setup if the predetermined price list’s price intervals are not the same, or you can go for an automatic setup and mention the iterations that will generate the price list automatically with equal intervals for you. It is always better to add an image and the product’s feature specification for which you want to determine the optimum price point. The respondents you have defined that are willing to make a purchase are shown a set of predefined prices. Prices can start randomly, or survey creators can set an initial cost displayed to the respondent. Technically speaking, Gabor-Granger is a randomized sequential monadic concept testing method where the respondents are sequentially shown one price at a time on which they will decide upon. This enables us to plot revenue and a demand curve to determine the revenue-maximizing price points.
Report & Analysis
You can view the results of an example of a Gabor Granger question, below.
The demand chart’s price elasticity helps us understand customers’ willingness to pay for the product at different price points.
Willingness to pay(%) & Revenue curve provides a simulated demand curve that helps us understand how the demand for the product changes with the price increase. The revenue curve allows us to identify the revenue-maximizing price points. Combining these two charts helps us decide an ideal price point that is high enough to cover expenses and maximize the revenue, but not so high that the product’s demand declines.
Using the Gabor Granger pricing model to calculate price elasticity and revenue-maximizing point
The advantage of the Gabor-Granger pricing model is it is relatively simple to use. Both respondents and survey creators can quickly and intuitively understand the question without any misunderstandings. This method’s application is to a small sample though we would recommend a minimum of 50 respondents to obtain statistically significant results.
You can calculate the elasticity of demand with the data collected. Elasticity of demand is a primary metric in pricing and consumer research since it showcases the effects of any pricing changes.
Products where the demand of elasticity is high (i.e., greater than 1.0) depicts that if a certain percentage lowers the price, the percentage volume generated will be greater than the percentage price increase. Equally, if the demand elasticity is less than 1.0, the percentage volume drop in sales would be lower if the price increased by a particular percent.
Price elasticity of demand = % change in the quantity demanded / % change in price
You can calculate the elasticity of demand by looking at the curve between an acceptable maximum price ($200) and an acceptable minimum price ($140), from the willingness to pay(%) and the revenue curve.
% change in the quantity demanded (35%)/(60%) = 0.58
The above indicates that the product is relatively inelastic. In this case, increasing or lowering the price will not generate a disproportionately higher volume of sales. Here, the company would be better off raising its costs as the increase in price would increase margins and a minimal business loss.
Difference between Gabor-Granger Method & Van Westendorp-Analysis
Researchers have developed different approaches to optimize the price, which helps users to price the product right. These approaches include direct methods like estimating willingness to pay, indirect methods like Gabor-Granger and Van Westendorp techniques, and price/attributes mix methods like conjoint choice models. These methods are widely used in market research to evaluate the optimal prices for different products and services. Indirect methods are more accurate than direct methods, as respondents are exposed to more realistic scenarios. These methods are quick and straightforward to administer. These methods derive information on why respondents chose not to buy a product or service. Indirect pricing methods are widely used and recognized in the research industry.
Gabor-Granger Pricing Technique
Gabor-Granger pricing technique is a convenient and practical pricing research method to work out an acceptable price that respondents can pay for a given product or service. In this approach, respondents are exposed to a randomly chosen price from the predetermined price list after introducing the product. The respondent is asked for a willingness to purchase the product or service at the given price. Suppose the respondent is willing to buy the product at that price, then the product is shown again, but this time with a higher price from the predetermined price list. If the respondent is not willing to get the merchandise at the primary price shown, the merchandise is shown again with a lower cost from the predetermined list. This pattern is iterated multiple times until the highest price point a respondent is willing to pay, is determined.
Van Westendorp Price Sensitivity Meter (PSM)
Van Westendorp pricing technique is based on four open-ended pricing questions:
- At what price would this product begin to be inexpensive?
- At what price would this product begin to be expensive?
- At what price would this product begin to be so expensive that you would never consider buying it?
- At what price would this product begin to be so inexpensive that you would doubt the quality and not buy it?
Respondents provide the price for each question. Answers are tabulated cumulatively and graphed. The intersections of the four lines provide an acceptable price range.
Key differences between Gabor-Granger modeling & Van Westendorp price sensitivity
The Gabor-Granger is most often used for already existing products. This model gives a directionally correct price estimate for willingness to pay for your product or service. It provides the revenue optimum price point, demand curve, and price elasticity, which helps researchers price a product right. This method is useful only when you want to look at your brand without considering the competition. This model works with limited predefined price points.
The Van Westendorp is most often used for new product pricing. Use Van Westendorp when you are unsure what price points the market can potentially accept. This model works on a whole spectrum of cost. It will provide users with an acceptable price range. It will help to understand the respondents’ attitude towards a product or service.
We recently conducted a webinar on Gabor-Granger vs. Van Westendrop pricing methods for optimal pricing research.
Pro’s & Con’s of the Gabor Granger Pricing Technique
The Gabor-Granger method results in a comparatively low survey effort and is straightforward to create and deploy. This pricing technique provides information that is crucial about how much a consumer can pay for a product and the perceived value to respondents. Hence, it has become a vital tool in pricing analytics.
One definite drawback that we have seen with the Gabor-Granger technique is that competing products are ignored in the study phase. This means that if a competitor offers a similar product at a lower price, the price point that your research invalidates your study. The above fallacy renders studies useless as they have no context over market conditions.
To mitigate a negative effect on the pricing study, if you were to show a shelf with competitors’ products and prices, it allows respondents to have comparable price points. Studies have shown that Gabor-Granger results are much closer to actuals when competitors’ products and prices are showcased upfront.
The Gabor-Granger method is particularly suitable under the following conditions:
- The organization has an acceptable fixed range of probable prices for the product or service
- The offering is so new that there are no similar products or competitors in the market, and the respondents do not have precedence of a similar design and features in the product
Example & case study of the Gabor Granger price modeling technique
As seen above, the Gabor Granger pricing method is a required survey research method in pricing and consumer research for price elasticity. An excellent example of the Gabor Granger modeling and is a case study of our existing clients is as follows.
We work with a multinational, global AA game studio that launches many games per year and uses the QuestionPro platform for quantitative research. One of the biggest uses of the QuestionPro platform for them is to be able to conduct consumer research, pricing research, understand price elasticity, and make decisions for pricing for new launches across geographies. For such research studies, the Van Westendorp and Gabor Granger method was considered and used.
While the former offered useful insights, bias was limited as the ranges changed based on countries and platforms. But the Gabor Granger pricing technique was perfect since it eliminated said bias and helped the stakeholders with optimal price points. This technique allowed our client to run a pricing research study across various markets and varied but large sample sizes to determine their launches’ right price point. Not just that, they were also able to decide on the right pricing strategy for various gaming consoles and also get an optimum pricing strategy for physical copies and digital editions of the game.
Using the Gabor Granger modeling helped increase research effectiveness and increase our customer’s bottom line and became an integral part of their pricing research.
You can conduct your consumer research with the Gabor Granger modeling with the QuestionPro research edition survey software.