Gabor Granger Price Optimization
Price is the least costly and easiest of the ‘four Ps’ to change, yet in the long term it may end up being the most expensive if set incorrectly. Pricing incorrectly may leave profit on the table. Worse, new brands may be eliminated from consumer consideration sets indefinitely if they enter the market too high, meaning a considerable advertising investment may be necessary to reposition the brand at a later stage. If a new brand enters the market at too low a price the brand may be perceived to be poor quality from the outset. Existing brands risk damaging brand positioning and being excluded from future consideration when changing price positioning.
By conducting a survey prior to changing prices or introducing a new product, you eliminate the risks that come with in-market experimentation. Gabor Granger is a well-known technique for quickly determining the correct pricing using a survey. Survey participants are shown various prices in order to determine purchase interest.
Acentric’s dynamic survey programming reduces the work load on the survey participant so that they evaluate fewer price points. In addition a model is fitted to provide estimates for ‘in-between’ price points, meaning only a few points need to be tested. An alternative technique to consider is Conjoint Analysis.
Green Toyland wanted to determine if one of its top selling items was optimally priced. While traditionally Gabor Granger studies aim to identify either peak volume or revenue, Acentric recommends optimizing Gross Profit as a more meaningful metric.
Management determined the range of prices it was interested in studying. Acentric then designed the survey to cover a 3 to 5 price points within this range. Survey participants were then shown a mid-range price point and asked to indicate intent to purchase, the price was then changed by an algorithm dependent on the survey participants last decision. As a result, participants didn’t need to respond to all price points (3 or less is all that is needed). After sample weights were applied for representation, a model was fitted to estimate response to any price point in the range (not just those tested). The results were then plotted.
The example below shows that revenue peaks at around R18 to R19. However if gross profit maximization is the goal, the optimal price is closer to R26.
Acentric Gabor Granger Graph