“Pricing is actually a pretty simple and straight forward thing. Customers will not pay literally a penny more than the true value of the product”, said Ron Johnson, CEO of JC Penny at the time.
The question is what value do consumers put on your product? A common way to understand this is to expose people to a price and then ask whether people would buy it or not—a technique commonly known as Gabor-Granger.
The Gabor-Granger approach to pricing is quite simple: you are presented with a product at a specified price and asked if you would purchase it or not. Then you are presented with another price and again asked if you would purchase it or not.
But do you start at a low price point and work your way up until the respondent says “no”? Or do you start high and go down until they say “yes”?
It can be argued that starting low and working your way up helps you find people’s breaking point, with regard to price.
It can also be argued that starting high and working your way down gives you a better read because people will be more likely to game the system once they realize the price is going to rise, if you start low.
Why argue when you can test?
Rather than sitting around arguing all day, my colleague Jane Tang and I thought we’d test what happens when we compared the results starting high vs. starting low, using this pricing technique.
We ran a simple test on an omnibus survey with a sample of 1,000 Canadians. Half the people were asked about purchasing an everyday product starting at a high price and decreasing. The other half started at a low price and then saw increasing prices. When they stopped saying yes, we stopped asking.
Price up or price down? What’s the difference?
The graph below plots the percent of people willing to purchase the product, as the price decreases from the highest price. The blue line shows the price sensitivity of those who saw decreasing prices. The yellow line depicts the curve for those who saw increasing prices.
Those who saw prices increase were more price sensitive. Their willingness to purchase declined by more than fifty percent as prices rose—compared to a variation of less than one third amongst those who saw decreasing prices.
It is notable that the sensitivity of those who saw increasing prices jumped after that had seen a few prices and realized they were likely to continue to increase. The greater sensitivity seen with the price increase group–and the timing of that sensitivity—suggests a greater likelihood they are reacting to the process.
If you are going to use this type of question to measure reaction to price, we recommend starting with the highest price and moving downward. These data points would suggest people are less likely to game the system and wait for a lower price before finally saying “yes”.
To learn more about our approach to pricing, please contact us today.
Who are these Gabor and Granger anyway?
The Gabor-Granger pricing technique is a footnote in the career of Nobel prize winner Sir Clive Granger. His focus was not on pricing, but rather on time-series analysis and forecasting. Working with Robert Engle, he developed the concept of cointegration, introduced in a 1987 joint paper in Econometrica; for which he was awarded the Nobel prize in 2003.
Andre Gabor wrote extensively on pricing, with his most popular book being “Pricing: concepts and methods for effective marketing”. His most cited publication was a paper with Granger: “Price as an Indicator of Quality: Report on an Enquiry”.
Sir Clive Granger’s collaboration with Andre Gabor was relatively fleeting. In his Nobel prize autobiography Sir Clive wrote that, during the latter half of the 1960’s, “I was also involved with André Gabor on some practical price research. To get data to test our theories and estimate models, we arranged with local supermarkets to conduct experiments in which we altered prices of popular products and recorded the change in sales. I believe that more economic micro-theory could be better tested by doing real world experiments rather than believing such an approach is impossible.”
It is this spirit of the belief in the value of real world experiments that lead us to test the effects of price up vs. price down.