Exhibit 26.3   Buy response curve derives using Gabor–Granger method

Respondents are presented with the product/service, along with contextual information, and asked their likelihood, on a 5-point scale, to purchase at different price points.

The data can reveal price thresholds beyond which the demand for a product falls sharply. For instance the output depicted in Exhibit 26.3 reveals a kink in demand at $1.65. When price is increased from 1.65 to 1.70, sales plunge by roughly 40%.

Though they are not commonly observed, kinks are known to arise due to factors relating to competitive response. For instance when government duties go up for products such as petroleum or cigarettes, if only a minority of suppliers take prices up, they will experience a sharper than expected fall in demand.

On the other hand, if a company takes successive price rises (or drops), it will experience relatively smaller losses (or gains) in volume if these adjustments are in sync with its competitors.

Gabor–Granger is a simple, speedy technique that provides fairly rough estimates. It may be used as ballpark for products where direct comparison of competitor offerings is not realistic.

Besides failing to take competitive scenario into account, the Gabor–Granger method suffers from the bias due to consumers becoming sensitized to price. This is typical of methods where respondents are presented with multiple price options of an identical product offering. When they become sensitized to price, respondents’ response to price changes gets exaggerated. This may be averted by using monadic tests where each respondent is asked for one price only, and prices are varied between different respondents in the overall sample. Monadic tests however require much larger samples, and consequently cost much more.

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