The Gabor Granger pricing method was developed by André Gabor and Clive Granger and is designed to determine the relationship between price and demand for a product or service. This methodology provides insights into both the price elasticity of a product and customers’ willingness to pay at various price points. This methodology helps clients determine the revenue optimizing price point and can be a useful tool to understand whether gross margin dollars also are maximized at the revenue optimizing price.
How the Gabor-Granger Methodology Works
To use this methodology, you start by describing a specific product and defining a price range with multiple price levels for that product. Then respondents answer a series of questions to determine the maximum price they are willing to pay for the described product:
Would you purchase Product A if it cost x?
In the series of questions, respondents are first randomly assigned a price point within the defined price range and asked the question above. The price is changed (up or down) depending on the response to the previous answer.
- If they are willing to pay price X, they are offered a higher price until they say “no”
- If they are not willing to pay price X, they are offered a lower price until they say “yes”
This series of questions provides insights into the maximum price each respondent is willing to pay and allows us to determine the demand curve.
Going a step further, we can determine the prices at which both revenue and gross profit are maximized.
Determining the revenue available at each price point requires fairly simple math: Number of potential customers X demand (% willing to purchase) X price point. In this example, we estimated a potential customer universe of ~2M purchasers:
2,000,000 X 80% X $2,000 = ~$3.2B
Determining where profit is maximized is a bit more complex and requires cost to manufacture. From this, gross margin can be calculated for each price point, which then plugs in to another fairly simple calculation:
Universe X Demand X Gross Profit Dollars
2,000,000 X 73% X $712 = ~$1,040M
These calculations are performed at each price point to determine the points at which both revenue and gross profit are maximized. Interestingly, revenue is maximized at a slightly lower price point ($2,000) than gross profit ($2,100).
Price | % of respondents that would purchase at x. | Revenue (Millions) | Gross Profit (Millions) |
$1,800 | 85% | $3,060 | $765 |
$1,900 | 83% | $3,150 | $885 |
$2,000 | 80% | $3,200 | $990 |
$2,100 | 73% | $3,070 | $1,040 |
$2,200 | 52% | $2,290 | $850 |
$2,300 | 48% | $2,210 | $885 |
$2,400 | 40% | $1,920 | $825 |
$2,500 | 30% | $1,500 | $690 |
Some important considerations when using this methodology include ensuring that you survey individuals who match your ideal customer profile and represent your target market. Additionally, this methodology isolates your product from competitors. Therefore, in a real-world situation, where other products offer different benefits, the outcomes may differ.
Finally, it is important to consider that while you may maximize revenues at a lower price point, other factors can affect your gross profit. For example, capacity constraints and scarce input materials can significantly impact costs and drive gross profit lower.
If you would like to learn more about pricing methodologies, you can read our microblog on the Van Westendorp Price Sensitivity Meter (PSM), a tool frequently used in conjunction with Gabor Grainger to determine the optimal price point and acceptable price range of a product.
Although the Gabor-Granger methodology may seem straightforward, as with any survey-based pricing research, it is important to consider both sample and data quality. As we’ve all heard…garbage in, garbage out. The Martec Group has 40 years of experience identifying and reaching the highest quality respondents, we welcome the opportunity to discuss our data quality control tactics. Please reach out to learn more.
For more insights on this and other pricing methodologies, please download our Pricing eBook which provides in-depth explanations of Price-Value Mapping, Benefit-Value Analysis, and Competitive Pricing Intelligence.