Making a pricing decision has to be one of the most challenging parts of business. Why? Well, getting the price of a product or service just right is a precarious balancing act. Price your product too high, and you’ll put off savvy customers who are looking for value for money. But, equally, if you price your product too low, some customers will perceive it to be too cheap, or poor in quality. Luckily, there are a few tried and tested methods of price optimization out there, and in this article, we’ll introduce you to a key one: the Gabor-Granger Pricing Method, which you can easily incorporate into your market research surveys as part of your research into optimal pricing. Read on to learn more about what the Gabor-Granger Pricing Method is, how and when to use it in your survey research.
Before we get into the specifics of the Gabor-Granger Pricing Method, let’s start by outlining what price optimization means, and the kind of data you need to do it.
Essentially, price optimization is a research process that helps you to pinpoint the best possible price point for a product or service. The difficulty with reaching an optimal price decision is that it involves a tradeoff between sales volumes and sales value, with major implications for the bottom line. Low prices usually mean better value for the customer, which drives higher volumes of sales, but can represent a loss to you in terms of revenue that each individual sale brings in. In contrast, higher price points may mean that each sale represents higher overall profit, but could reduce sales volumes if customers see the higher price as representing lower value for money.
Price optimization establishes the foundation for a sound pricing decision. It helps you to find that lucrative sweet spot between value and volumes, and that’s a precarious balance that can have a major impact on customer satisfaction, loyalty, sales, and ultimately—profitability and growth.
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You should never guess prices. Instead, spend some time gathering hard facts and data, which will put you in the best possible position to get your price right the first time. To support effective pricing decisions, consider the use of the following data sources:
This is the best way to find out what customers are willing to pay, and to determine the linkages between willingness to pay at different price points, purchase frequency, likely customer churn, and the amount that customers will likely spend with you. Existing customers are an excellent source of information but it's important to glean insight from prospective customers as well. The types of survey questions you might ask include customers’ perceptions of your current pricing, their ideas about what constitutes value for money, and their likely reactions to loyalty programs, sales tactics, discounts, or promotions.
When gathering survey data, don’t forget to capture demographic and psychographic information like age, gender, household income and lifestyles. This will be crucial because different segments and categories of consumers will likely respond differently to different price points. Price optimization often means not just setting one price, but setting several.
If you’re already running your business, great news: you already have access to some very powerful data. Analysis of historical sales data can help you understand whether and the extent to which sales have changed in response to price changes.
Profitable businesses need to cover their operating costs, so feed this information into your analysis too. This is especially the case if you’re using a cost-plus pricing strategy, or some kind of price designed to appear low in the minds of consumers, like penetration pricing or competitive pricing. More on that below.
It may not seem obvious but consider how many products or supplies you have in stock before you embark on your price optimization journey. Many companies have inadvertently undermined their reputations in the minds of consumers by heavily discounting prices, and driving heavy levels of sales, only to find that they quickly went out of stock, disappointing customers.
Some companies may find that they can use machine learning models to optimize prices. Machine learning can gather together and automate very large datasets in order to reach optimal prices quickly, efficiently, and with limited manual effort. Furthermore, machine learning models often take into consideration data that you might not have thought about using, such as weather patterns, seasonal changes and the occurrence of major events.
If your business follows a subscription based model, don’t overlook the lifetime value of existing customers, as well as their churn rate. If you find that customers sign up and then quickly leave, you may find it is because prices are high compared to competitors, or that you need to lower prices in order to maximize subscription length, and hence customer value.
Price optimization usually involves optimizing for several different prices, not just one. As well as optimizing your standard prices, we also recommend performing price optimization for:
The point at which your product first launches is vital to establishing it in the market and in the minds of customers. If you start with too low a price, you may gain some early traction, but you could lose sales in the long run as you begin to raise prices, as customers begin to think you no longer represent value for money. Alternatively, too high a starting price could cause you to miss out on sales from that lucrative innovator/early adopter segment of consumer.
In order to drive sales, you might think a discount is the way forward. That’s often the case, but what level of discount should you offer? A 5% discount might be seen as measly by customers but could protect your bottom line. A 50% discount could be seen as a bonanza, but might undermine long term profit. Price optimization is a delicate process when it comes to discounts.
Which is better: slashing prices to half of their original price, or offering a buy one get one free (BOGOF) deal? On paper, both strategies have the potential to yield the same revenues, but practice and paper are very different beasts. Price optimization can help you determine the most effective and profitable approach to promotional prices.
Price optimization is crucial for a myriad of reasons, all of which make a contribution to your bottom line:
Under—or over-pricing products and services are among some of the biggest causes of business failure and lack of profitability.
In contrast, if you optimize your prices, you’ll be best placed to grow quickly, because you’ll not only have the revenues to leverage growth, but you’ll also have a loyal customer base that you know is willing to pay the prices you set.
Failure to meet customers’ expectations is a surefire way to drive them to competitors. You can only meet customers’ needs if you understand what those needs are, and that includes the prices they expect from you.
Research to support price optimization can be complex, but once you’ve got the data, you’ll be able to replicate the analysis over and over again, saving you time and driving sales in the long run.
Optimal prices are the best way to portray that your prices are value for money. For example, there is a fine line between what customers consider a bargain, and what they consider to be too cheap. It’s not worth trying to guess where that sweet spot lies—use hard facts and data to help you.
Let’s take a look at one method you can use to gather a crucial piece of information— how elastic, or sensitive your products and services are to price changes. Read on to learn more about the Gabor-Granger Pricing Method, and how you can incorporate it into your market research activities.
Developed in the 1960s by two economists—Andre Gabor and Clive Granger, the Gabor-Granger Method is a technique used in survey research for determining the price elasticity of products and services. Price elasticity describes the responsiveness of demand changes in price levels. A product is price elastic if even minor fluctuations in price are associated with changes in demand. When the demand for a product does not alter, or alters very little in response to price changes, the product is price inelastic. Knowing whether your product is price elastic or inelastic is crucial because it’s linked to demand—and hence projected sales levels. If your product is inelastic, you’re in a strong position: you are able to increase prices without expecting sales to fall. However, if your product is price elastic, you’ll need to be much more careful when making price decisions.
How it works
The Gabor-Granger Method is a pricing research technique for determining a revenue and demand curve for a specific product or service at different price points. Incorporated into a survey, this very simple method works as follows. Respondents are shown different prices sequentially and asked about their likelihood of purchase at each of the prices shown. For example, you might present an image of your product and simply ask customers:
How likely are you to buy this product at X price?
Respondents will provide one answer in the 5 point scale. If they answer Extremely Likely or Very Likely, they would be counted towards a top-2-box score. If respondents answer in the bottom 3, the price is lowered and the question repeated. The process continues until the methodology finds the top price that customers would pay.
The data collected through this method enables researchers to plot a revenue and demand curve to determine the optimum price to deliver the maximum revenue. This information can be used to find out:
The main benefit of the Gabor-Granger technique is that it is relatively easy to use. It takes what can be a daunting, complex and challenging task—optimizing prices—and simplifies it by identifying crucial information about how much a consumer can pay for a product and the perceived value of the product to your target market.
The problem with the most common pricing strategies – cost-plus pricing, or competitive pricing – is that they ignore the willingness of buyers to pay the price that is determined. Cost-plus pricing means calculating your cost base and simply adding a percentage mark-up, while competitive pricing involves setting prices based on market averages. However, even if prices are competitive compared to those of rivals, or mark-up is low, customers might still be unwilling to purchase the product. Alternatively, customers might buy the product, but not in numbers that could optimize sales.
The Gabor-Granger Pricing Method is a simple way to use data-driven, real-life evidence to set the best possible price for your product. Furthermore, both respondents and survey creators can quickly and intuitively understand Gabor-Granger questions without any misunderstandings, which means that the technique can be used widely, and with relatively limited effort.
The Gabor-Granger Pricing Technique can be used to serve a number of different purposes. It can be especially useful if:
In other words, you can use the data gleaned from answers to Gabor-Granger questions to predict the price at which an optimal number of customers are willing to purchase it. Using this information, you’ll be in a position to predict sales and profits.
Perhaps using historic sales data or other data, you have identified a range of prices that you think your customers might be willing to pay. The upper and lower anchors of your range can form the basis of your survey research, and be used to pinpoint an optimal price.
The results of Gabor-Granger data collection methods can be used to determine whether you can change the price of products, by how much, and the impact on sales. This information is the basis of finding out the exact price at which your revenue is maximized.
Retailers have a number of different strategies available to them if they want to drive sales. They might make changes to the features of benefits of a product, offer bulk or package discounts, or run a promotion. However, if, for some reason these elements are fixed, the Gabor-Granger technique provides a way for you to manipulate the marketing mix in order to bolster sales.
So, there you have it: knowing how price elastic your products and services are can help you to come up with an optimal pricing strategy. In turn, this will help you boost your revenues—and your profits. Ready to use the Gabor-Granger Pricing Methods in your survey research? Momentive consultants are standing by to help you craft your price optimization study. And we can also take care of any other market research needs.
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