FIND
GABOR GRANGER METHOD AND HOW IT WORKS TO ACHIEVE BEST PRICE FOR YOUR PRODUCTS
OR SERVICES
Gabor Granger (GG) method
is a pricing analysis technique to optimize pricing decisions under certain
market conditions. It helps to
understand the elasticity of demand – change in demand with respect to changes
in prices. The elasticity of demand will
determine if the price can be increased or decreased without affecting the
demand, thus increasing the profit margin.
GG analysis will provide three important metrics – the demand for the
product at various price points, maximum revenue generating price point and
price elasticity.
When it can be Used?
The GG method is most
preferred for an existing product that needs price optimization due to improved
features, discount price, competitions, outdated technology, etc. Therefore, businesses need to have predefined
set of price choices to discuss with the potential customers or survey
respondents. They should also finalize
the maximum price point that needs to be asked of the survey respondents.
How is it Used?
The Gabor Granger method works
on simple procedure by asking the respondent on what the maximum price they are
willing to pay for the products shown using predefined set of price
points. The price points will be shown
in random sequence or from the highest price.
The question will be repeated with different price points until the
maximum price a respondent is willing to pay is determined.
The GG method will quickly
provide insight into the optimal price point that can generate maximum revenue
for the business. In this case, $1,500
will generate maximum revenue of $60,000.
Further to analyze how far the price change will impact on the demand,
it is important to understand the elasticity of demand. This elasticity analysis is crucial to
finalize the price as to whether to increase or decrease beyond a price level.
Price Elasticity
Price Elasticity itself is
calculated for two different uses as elasticity of demand and elasticity of
supply. The latter is used to understand
the supply side and not applicable for customer surveys. Hence, we focus on price elasticity of demand
side for this article. It can be defined
as the rate of change in demand / consumption in relation to the rate of change
in price.
This price elasticity has
three key conditions that will help us to show the impact of price change vs
demand.
Price Inelastic: If the elasticity of demand is less than “1”, then it
is considered “inelastic”. That means,
even if the price is increased after the revenue maximizing price point, the
decrease in demand is less as compared to the increase in price. Therefore, businesses have further
opportunity to increase the price beyond the revenue maximizing price
point. In our case, $1,500 is generating
maximum revenue, but the company can test by increasing its price up to $2,000 as
the demand will not decrease faster than the price increase.
Price Elastic: This occurs when the elasticity of demand is greater
than “1”. This indicates that increasing
the price further will affect the decrease in demand and reduce the revenue
drastically. If the product shown is
priced at $2,000 and increases thereafter, it will decrease the demand faster
than the rate of price increase. Thus,
the price increase cannot outweigh the demand resulting in poor revenue.
Unit elasticity: Elasticity of demand will be equal to 1 in the unit
elasticity. The percentage change in
price increase will be proportional to the percentage change in demand
decrease. From this price point to the
next elasticity change, the revenue will remain the same with an increase or
decrease in price as the demand will also increase or decrease to the same
proportion. This price point will be
helpful if the company decides to at least achieve the previous revenue mark
even after price change. This is a safer
zone where the business does not like to lose the previously achieved
profit. For e.g. If the company sells the guitar at a price of
$1,000 and the number of sales per month is 12, then the revenue generated will
be $12,000. The company decided to
reduce the price by 20% ($800) so it can increase the demand and make more
revenue. But the company also would like
to find the unit elasticity ratio in order to at least achieve its previous
revenue to be safer. If the sale
increases by 25%, then the company could achieve the same revenue as
$12,000. This is called unit elasticity.
The price elasticity is an
important metric even if the revenue maximizing price point is known. The price elasticity will tell the business
till where the price point can be increased or decreased because the survey
itself cannot ask every price point from the customers which will make the
respondent lose their focus.
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