Gabor-Granger Pricing Method

The Gabor-Granger pricing method determines the price elasticity of products and services. Developed by two economists, André Gabor and Clive Granger, it has been used since the 1960s. It is particularly useful when:

  • You want to get a directionally correct estimate for willingness to pay for the product.
  • You want to find revenue-optimising price points.
  • All the other components (or attributes) of the product or service are fixed and cannot be changed.
  • You only want to look at your brand or SKU without considering competition.

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Price elasticity chart

The price elasticity of demand curve shows customers' willingness to pay for your product at different price points. The steeper the demand curve, the more price-sensitive customers are in relation to your product.

Revenue vs. price chart

The “revenue vs. price” curve helps identify revenue-maximising price points.

For example, this chart below suggests that the revenue-maximising price is around $24.

Flow of Gabor-Granger questions

Each respondent is given a series of almost identical questions such as “Would you buy product X at price Y?”. In each of the several questions, the price shown to a respondent is different: it is adapted based on the respondent's previous answer with the aim to find the maximum price each respondent is willing to pay for a product.

In this example, we have price points from $50 to $170 (incremented by $10):

  1. Respondents are randomly assigned to one price.
  2. If they are willing to pay that price, they are offered a higher (randomly chosen) price.
  3. If they are not willing to pay that price, they are offered a lower (randomly chosen) price.
  4. The algorithm repeats until we find the highest price each respondent is willing to pay.
Flow of Gabor-Granger questions

How it works

You need to specify several price levels (ideally, between 5 and 15 price levels). For example: $10, $20, $30, $40, $50, $60.

In, you can add as many Gabor-Granger exercises in a single experiment as you need (to test different products). Gabor-Granger can be used as a separate experiment or an additional question added to conjoint, Van Westendorp, or another survey.

Technically speaking, Gabor-Granger is a type of a randomised sequential monadic test where respondents are sequentially given one option at a time in which they will make a decision upon.

When you need to examine product attributes other than price (e.g., design, quality, power) or you also need to look at competitive brands, it would be more appropriate to use conjoint analysis, where price and brand are only two of the attributes among many. Conjoint studies can also provide more precise estimates for total willingness to pay and are less prone to understating the acceptable price by research participants.

There are two biases in the Gabor-Granger methodology which mostly offset each other:

  • Understatement of willingness to pay: Where a price is shown explicitly, respondents can reckon that the purpose of the study is to set a price. They may be tempted to understate their willingness to pay to “game” the company into offering lower prices.
  • Overstatement of purchase intention: While respondents may state a willingness to purchase a product in a survey, real-life purchase decisions will often be swayed by many other factors and will result in a lower level of buying than reported in the test.