gabor granger
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TechnicalMemorandum
2009:003
W.RPaczkowski
Technical Memorandum
Gabor Granger Pricing Method
Walter R. Paczkowski, Ph.D.
Data Analytics Corp.
September 25, 2009
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 1 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 2 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Part I
Technical Memoranda
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 3 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Technical Memoranda
Data Analytics Corp. periodically issues technical memorandaon methodologies useful to those in the market research andpredictive modeling communities. The memoranda alsoillustrate some of the analysis capabilities of Data AnalyticsCorp.
Please feel free to send constructive comments and projectinquiries to
info@dataanalyticscorp.com
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 4 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Part II
Introduction
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 5 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Introduction
A very important question all product managers musteventually ask is:
”What price should I set for my product or service?”
Price is the only marketing ”P” directly affecting thebottom-line.1
Knowing the demand curve is critical for setting price.
An equally important item is the price elasticity.
This is used to gauge how much prices can be changed.It’s directly used in determining the amount of revenuethat can be earned.
1The marketing ”Ps” are price, product, promotion, place, position.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Introduction
A very important question all product managers musteventually ask is:
”What price should I set for my product or service?”
Price is the only marketing ”P” directly affecting thebottom-line.1
Knowing the demand curve is critical for setting price.
An equally important item is the price elasticity.
This is used to gauge how much prices can be changed.It’s directly used in determining the amount of revenuethat can be earned.
1The marketing ”Ps” are price, product, promotion, place, position.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Introduction
A very important question all product managers musteventually ask is:
”What price should I set for my product or service?”
Price is the only marketing ”P” directly affecting thebottom-line.1
Knowing the demand curve is critical for setting price.
An equally important item is the price elasticity.
This is used to gauge how much prices can be changed.It’s directly used in determining the amount of revenuethat can be earned.
1The marketing ”Ps” are price, product, promotion, place, position.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Introduction
A very important question all product managers musteventually ask is:
”What price should I set for my product or service?”
Price is the only marketing ”P” directly affecting thebottom-line.1
Knowing the demand curve is critical for setting price.
An equally important item is the price elasticity.
This is used to gauge how much prices can be changed.
It’s directly used in determining the amount of revenuethat can be earned.
1The marketing ”Ps” are price, product, promotion, place, position.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Introduction
A very important question all product managers musteventually ask is:
”What price should I set for my product or service?”
Price is the only marketing ”P” directly affecting thebottom-line.1
Knowing the demand curve is critical for setting price.
An equally important item is the price elasticity.
This is used to gauge how much prices can be changed.It’s directly used in determining the amount of revenuethat can be earned.
1The marketing ”Ps” are price, product, promotion, place, position.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Introduction(Continued)
The Gabor Granger pricing methodology is an old method fordetermining a demand curve for a product. The price elasticityand revenue curve can then be derived.
The economists Clive Granger (2003 Nobel Memorial Prize inEconomic Sciences) and Andre Gabor developed themethodology in the 1960s. Since then, more sophisticatedtechniques have been developed. The Gabor Grangermethodology is still occasionally used because of its intuitiveappeal, but it is dated and not the best.
See the section Other Pricing Research Methodologies belowfor a discussion of issues with Gabor Granger and otherapproaches that could be used. Also see other Data AnalyticsCorp. Technical Memorandum.
Jump to Other Pricing Research Methodologies
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 7 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Introduction(Continued)
The Gabor Granger pricing methodology is an old method fordetermining a demand curve for a product. The price elasticityand revenue curve can then be derived.
The economists Clive Granger (2003 Nobel Memorial Prize inEconomic Sciences) and Andre Gabor developed themethodology in the 1960s. Since then, more sophisticatedtechniques have been developed. The Gabor Grangermethodology is still occasionally used because of its intuitiveappeal, but it is dated and not the best.
See the section Other Pricing Research Methodologies belowfor a discussion of issues with Gabor Granger and otherapproaches that could be used. Also see other Data AnalyticsCorp. Technical Memorandum.
Jump to Other Pricing Research Methodologies
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 7 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Introduction(Continued)
The Gabor Granger pricing methodology is an old method fordetermining a demand curve for a product. The price elasticityand revenue curve can then be derived.
The economists Clive Granger (2003 Nobel Memorial Prize inEconomic Sciences) and Andre Gabor developed themethodology in the 1960s. Since then, more sophisticatedtechniques have been developed. The Gabor Grangermethodology is still occasionally used because of its intuitiveappeal, but it is dated and not the best.
See the section Other Pricing Research Methodologies belowfor a discussion of issues with Gabor Granger and otherapproaches that could be used. Also see other Data AnalyticsCorp. Technical Memorandum.
Jump to Other Pricing Research Methodologies
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 7 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Part III
Methodology
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 8 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology
For pricing, consumers can be asked their willingness to buy aproduct at different price points
It is assumed that this querying will reveal the price pointat which the consumer will no longer be interested inbuying the product
Consumers respond with a ”buy-not buy” response toeach price.
The method is sometimes called the ”buy-responsemethod”.
The constant querying enables the pricing analyst to traceout a demand curve.
Once the demand curve is derived, a revenue curve can beoverlayed to help determine the optimal price.
The optimal price is determined where the revenue curve isa maximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology
For pricing, consumers can be asked their willingness to buy aproduct at different price points
It is assumed that this querying will reveal the price pointat which the consumer will no longer be interested inbuying the product
Consumers respond with a ”buy-not buy” response toeach price.
The method is sometimes called the ”buy-responsemethod”.
The constant querying enables the pricing analyst to traceout a demand curve.
Once the demand curve is derived, a revenue curve can beoverlayed to help determine the optimal price.
The optimal price is determined where the revenue curve isa maximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology
For pricing, consumers can be asked their willingness to buy aproduct at different price points
It is assumed that this querying will reveal the price pointat which the consumer will no longer be interested inbuying the product
Consumers respond with a ”buy-not buy” response toeach price.
The method is sometimes called the ”buy-responsemethod”.
The constant querying enables the pricing analyst to traceout a demand curve.
Once the demand curve is derived, a revenue curve can beoverlayed to help determine the optimal price.
The optimal price is determined where the revenue curve isa maximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology
For pricing, consumers can be asked their willingness to buy aproduct at different price points
It is assumed that this querying will reveal the price pointat which the consumer will no longer be interested inbuying the product
Consumers respond with a ”buy-not buy” response toeach price.
The method is sometimes called the ”buy-responsemethod”.
The constant querying enables the pricing analyst to traceout a demand curve.
Once the demand curve is derived, a revenue curve can beoverlayed to help determine the optimal price.
The optimal price is determined where the revenue curve isa maximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology
For pricing, consumers can be asked their willingness to buy aproduct at different price points
It is assumed that this querying will reveal the price pointat which the consumer will no longer be interested inbuying the product
Consumers respond with a ”buy-not buy” response toeach price.
The method is sometimes called the ”buy-responsemethod”.
The constant querying enables the pricing analyst to traceout a demand curve.
Once the demand curve is derived, a revenue curve can beoverlayed to help determine the optimal price.
The optimal price is determined where the revenue curve isa maximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology
For pricing, consumers can be asked their willingness to buy aproduct at different price points
It is assumed that this querying will reveal the price pointat which the consumer will no longer be interested inbuying the product
Consumers respond with a ”buy-not buy” response toeach price.
The method is sometimes called the ”buy-responsemethod”.
The constant querying enables the pricing analyst to traceout a demand curve.
Once the demand curve is derived, a revenue curve can beoverlayed to help determine the optimal price.
The optimal price is determined where the revenue curve isa maximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology
For pricing, consumers can be asked their willingness to buy aproduct at different price points
It is assumed that this querying will reveal the price pointat which the consumer will no longer be interested inbuying the product
Consumers respond with a ”buy-not buy” response toeach price.
The method is sometimes called the ”buy-responsemethod”.
The constant querying enables the pricing analyst to traceout a demand curve.
Once the demand curve is derived, a revenue curve can beoverlayed to help determine the optimal price.
The optimal price is determined where the revenue curve isa maximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?””How likely are you to buy this product at this price?””Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?””How likely are you to buy this product at this price?””Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.
Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?””How likely are you to buy this product at this price?””Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?””How likely are you to buy this product at this price?””Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?””How likely are you to buy this product at this price?””Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?””How likely are you to buy this product at this price?””Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?”
”How likely are you to buy this product at this price?””Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?””How likely are you to buy this product at this price?”
”Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The approach involves asking a series of questions. . .
The consumer is presented with a price for a product.
The first price point sets a standard for comparing otherprices, so this point is often set at random or based on an”expected” price level.Most studies start at a pre-determined price point.
The consumer is then asked if he/she would buy theproduct at that price point.
There is no ”standard” way to ask this question. Somepossibilities are. . .
”Would you buy the product at this price?””How likely are you to buy this product at this price?””Would you be willing to pay $Y for this product?”
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The consumer is then shown another price and the question isrepeated.
There are several ways to determine the next price toask. . .
Purely random selectionIncrease or decrease the price dependent on whether therespondent said they would or wouldn’t buy, respectively.Increase or decrease at random
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 11 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The consumer is then shown another price and the question isrepeated.
There are several ways to determine the next price toask. . .
Purely random selection
Increase or decrease the price dependent on whether therespondent said they would or wouldn’t buy, respectively.Increase or decrease at random
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 11 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The consumer is then shown another price and the question isrepeated.
There are several ways to determine the next price toask. . .
Purely random selectionIncrease or decrease the price dependent on whether therespondent said they would or wouldn’t buy, respectively.
Increase or decrease at random
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 11 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
The consumer is then shown another price and the question isrepeated.
There are several ways to determine the next price toask. . .
Purely random selectionIncrease or decrease the price dependent on whether therespondent said they would or wouldn’t buy, respectively.Increase or decrease at random
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 11 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Calculations
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 12 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Across all consumers, calculate the proportion respondingfavorably at each price point
Plot the proportions of consumers vs. price points
Also calculate the expected revenue per 100 people ateach price point
Revenue = (Percent Responding Favorably) · Price
Plot Revenue vs. price point
The optimal price is where the revenue curve is amaximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Across all consumers, calculate the proportion respondingfavorably at each price point
Plot the proportions of consumers vs. price points
Also calculate the expected revenue per 100 people ateach price point
Revenue = (Percent Responding Favorably) · Price
Plot Revenue vs. price point
The optimal price is where the revenue curve is amaximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Across all consumers, calculate the proportion respondingfavorably at each price point
Plot the proportions of consumers vs. price points
Also calculate the expected revenue per 100 people ateach price point
Revenue = (Percent Responding Favorably) · Price
Plot Revenue vs. price point
The optimal price is where the revenue curve is amaximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Across all consumers, calculate the proportion respondingfavorably at each price point
Plot the proportions of consumers vs. price points
Also calculate the expected revenue per 100 people ateach price point
Revenue = (Percent Responding Favorably) · Price
Plot Revenue vs. price point
The optimal price is where the revenue curve is amaximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Across all consumers, calculate the proportion respondingfavorably at each price point
Plot the proportions of consumers vs. price points
Also calculate the expected revenue per 100 people ateach price point
Revenue = (Percent Responding Favorably) · Price
Plot Revenue vs. price point
The optimal price is where the revenue curve is amaximum.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
$ 0
$ 2
$ 4
$ 6
$ 8
$10
$ 0 $1,000 $2,000 $3,000 $4,000 $5,000
DemandRevenue
Expected Revenue
Percent Responding Favorably
Pric
e Optimal Price: $5
Demand and Revenue Curves
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Elasticities can also be calculated. Several possible ways are. . .
Calculate the mean percentage change in responses perpercentage change in price.
Estimate a simple linear (or linearized) model withresponses as the dependent variable and prices as theindependent variable.
Response = β0 + β1Price + ε
The elasticity, η, would then be for this model. . .
η = β1 ·Price
Response
where X is the average.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 15 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Elasticities can also be calculated. Several possible ways are. . .
Calculate the mean percentage change in responses perpercentage change in price.
Estimate a simple linear (or linearized) model withresponses as the dependent variable and prices as theindependent variable.
Response = β0 + β1Price + ε
The elasticity, η, would then be for this model. . .
η = β1 ·Price
Response
where X is the average.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 15 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Elasticities can also be calculated. Several possible ways are. . .
Calculate the mean percentage change in responses perpercentage change in price.
Estimate a simple linear (or linearized) model withresponses as the dependent variable and prices as theindependent variable.
Response = β0 + β1Price + ε
The elasticity, η, would then be for this model. . .
η = β1 ·Price
Response
where X is the average.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 15 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Elasticities can also be calculated. Several possible ways are. . .
Calculate the mean percentage change in responses perpercentage change in price.
Estimate a simple linear (or linearized) model withresponses as the dependent variable and prices as theindependent variable.
Response = β0 + β1Price + ε
The elasticity, η, would then be for this model. . .
η = β1 ·Price
Response
where X is the average.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 15 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
A Better Approach
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 16 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
A better analysis approach is to recognize that the responsefrom each consumer is binary – buy or not buy. Theseresponses are better analyzed using a logistic regression modelto model the probability of a randomly selected consumerresponding ”buy” to a particular price. The model is. . .
Pr(Buy) =eZ
1 + eZ
where Z = β0 + β1Price
The elasticity if then. . .
η = β1 · Price · [1 − Pr(Buy)]
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 17 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
A better analysis approach is to recognize that the responsefrom each consumer is binary – buy or not buy. Theseresponses are better analyzed using a logistic regression modelto model the probability of a randomly selected consumerresponding ”buy” to a particular price. The model is. . .
Pr(Buy) =eZ
1 + eZ
where Z = β0 + β1Price
The elasticity if then. . .
η = β1 · Price · [1 − Pr(Buy)]
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 17 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Revenue is estimated as. . .
Revenue = Addressable Market · Pr(Buy) · Price
where the Addressable Market is the number of consumers.
A simulator can be built to allow the marketing analyst to varythe price to gauge the effect on. . .
1 Units sold (= Addressable Market · Pr(Buy))
2 Revenue
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 18 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Revenue is estimated as. . .
Revenue = Addressable Market · Pr(Buy) · Price
where the Addressable Market is the number of consumers.
A simulator can be built to allow the marketing analyst to varythe price to gauge the effect on. . .
1 Units sold (= Addressable Market · Pr(Buy))
2 Revenue
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 18 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Calculations
A BetterApproach
Methodology(Continued)
Revenue is estimated as. . .
Revenue = Addressable Market · Pr(Buy) · Price
where the Addressable Market is the number of consumers.
A simulator can be built to allow the marketing analyst to varythe price to gauge the effect on. . .
1 Units sold (= Addressable Market · Pr(Buy))
2 Revenue
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 18 / 26
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Part IV
Other Pricing Research Methodologies
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Other Pricing Research Methodologies
The Gabor Granger Pricing Method is old. The vanWestendorp Price Sensitivity Meter is sometimes consideredthe next generation methodology beyond this one. See theData Analytics Corp. Technical Memorandum #2009:001.
Return .
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Other Pricing Research Methodologies(Continued)
The Gabor Granger Pricing Method has several majorproblems. . .
1 It does not ask the consumer to trade-off price for otherproduct attributes, a normal consumer decision
The preferred pricing research methods allow trade-offs
2 Consumers may understate the price they will pay.Therefore, phrasing the ”Will you buy?” question is veryimportant.
3 Consumers are not given a reference frame for answeringthe questions. Research shows they need a consistentreference frame.
4 Most consumers do not consider buying a product at asingle price – a make or break price point – but instead arewilling to buy within a range of prices, and Gabor Grangerdoes not allow for a range.
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Other Pricing Research Methodologies(Continued)
The Gabor Granger Pricing Method has several majorproblems. . .
1 It does not ask the consumer to trade-off price for otherproduct attributes, a normal consumer decision
The preferred pricing research methods allow trade-offs
2 Consumers may understate the price they will pay.Therefore, phrasing the ”Will you buy?” question is veryimportant.
3 Consumers are not given a reference frame for answeringthe questions. Research shows they need a consistentreference frame.
4 Most consumers do not consider buying a product at asingle price – a make or break price point – but instead arewilling to buy within a range of prices, and Gabor Grangerdoes not allow for a range.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
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Other Pricing Research Methodologies(Continued)
The Gabor Granger Pricing Method has several majorproblems. . .
1 It does not ask the consumer to trade-off price for otherproduct attributes, a normal consumer decision
The preferred pricing research methods allow trade-offs
2 Consumers may understate the price they will pay.Therefore, phrasing the ”Will you buy?” question is veryimportant.
3 Consumers are not given a reference frame for answeringthe questions. Research shows they need a consistentreference frame.
4 Most consumers do not consider buying a product at asingle price – a make or break price point – but instead arewilling to buy within a range of prices, and Gabor Grangerdoes not allow for a range.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
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W.RPaczkowski
Other Pricing Research Methodologies(Continued)
The Gabor Granger Pricing Method has several majorproblems. . .
1 It does not ask the consumer to trade-off price for otherproduct attributes, a normal consumer decision
The preferred pricing research methods allow trade-offs
2 Consumers may understate the price they will pay.Therefore, phrasing the ”Will you buy?” question is veryimportant.
3 Consumers are not given a reference frame for answeringthe questions. Research shows they need a consistentreference frame.
4 Most consumers do not consider buying a product at asingle price – a make or break price point – but instead arewilling to buy within a range of prices, and Gabor Grangerdoes not allow for a range.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
TechnicalMemorandum
2009:003
W.RPaczkowski
Other Pricing Research Methodologies(Continued)
The Gabor Granger Pricing Method has several majorproblems. . .
1 It does not ask the consumer to trade-off price for otherproduct attributes, a normal consumer decision
The preferred pricing research methods allow trade-offs
2 Consumers may understate the price they will pay.Therefore, phrasing the ”Will you buy?” question is veryimportant.
3 Consumers are not given a reference frame for answeringthe questions. Research shows they need a consistentreference frame.
4 Most consumers do not consider buying a product at asingle price – a make or break price point – but instead arewilling to buy within a range of prices, and Gabor Grangerdoes not allow for a range.
W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
TechnicalMemorandum
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W.RPaczkowski
Other Pricing Research Methodologies(Continued)
The Gabor Granger Pricing Method has several majorproblems. . .
1 It does not ask the consumer to trade-off price for otherproduct attributes, a normal consumer decision
The preferred pricing research methods allow trade-offs
2 Consumers may understate the price they will pay.Therefore, phrasing the ”Will you buy?” question is veryimportant.
3 Consumers are not given a reference frame for answeringthe questions. Research shows they need a consistentreference frame.
4 Most consumers do not consider buying a product at asingle price – a make or break price point – but instead arewilling to buy within a range of prices, and Gabor Grangerdoes not allow for a range.
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Other Pricing Research Methodologies(Continued)
These other pricing research methodologies are described inthree other Data Analytics Corp. Technical Memoranda
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Part V
Recommended Readings
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Recommended Readings
Gabor, A.Pricing: Concepts and Methods for Effective Marketing2nd edition.Gower PublishingHaqmpshire, U.K. (1988)
Monroe, K.Pricing: Making Profitable Decisions2nd editionMcGraw-Hill Publishing Co.New York (1990)
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Part VI
Contact Information
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Walter R. Paczkowski, Ph.D.
44 Hamilton LanePlainsboro, NJ 08536www.dataanalyticscorp.com
Voice: 609-936-8999Fax: 609-936-3733
info@dataanalyticscorp.com
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