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Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                                         Technical Memorandum

      ...
Technical
Memorandum
  2009:003

    W.R
 Paczkowski




W.R Paczkowski (Data Analytics Corp. )   Technical Memorandum 200...
Technical
Memorandum
  2009:003

    W.R
 Paczkowski




                                                         Part I

...
Technical Memoranda

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski       Data Analytics Corp. periodically issues ...
Technical
Memorandum
  2009:003

    W.R
 Paczkowski




                                                        Part II

...
Introduction

 Technical
Memorandum
  2009:003
                  A very important question all product managers must
    W...
Introduction

 Technical
Memorandum
  2009:003
                  A very important question all product managers must
    W...
Introduction

 Technical
Memorandum
  2009:003
                  A very important question all product managers must
    W...
Introduction

 Technical
Memorandum
  2009:003
                  A very important question all product managers must
    W...
Introduction

 Technical
Memorandum
  2009:003
                  A very important question all product managers must
    W...
Introduction
                (Continued)

 Technical
Memorandum
                  The Gabor Granger pricing methodology is...
Introduction
                (Continued)

 Technical
Memorandum
                  The Gabor Granger pricing methodology is...
Introduction
                (Continued)

 Technical
Memorandum
                  The Gabor Granger pricing methodology is...
Technical
Memorandum
  2009:003

    W.R
 Paczkowski

Calculations

A Better                                              ...
Methodology

 Technical
Memorandum
                  For pricing, consumers can be asked their willingness to buy a
  2009...
Methodology

 Technical
Memorandum
                  For pricing, consumers can be asked their willingness to buy a
  2009...
Methodology

 Technical
Memorandum
                  For pricing, consumers can be asked their willingness to buy a
  2009...
Methodology

 Technical
Memorandum
                  For pricing, consumers can be asked their willingness to buy a
  2009...
Methodology

 Technical
Memorandum
                  For pricing, consumers can be asked their willingness to buy a
  2009...
Methodology

 Technical
Memorandum
                  For pricing, consumers can be asked their willingness to buy a
  2009...
Methodology

 Technical
Memorandum
                  For pricing, consumers can be asked their willingness to buy a
  2009...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003
                  The approach involves asking a...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  The consu...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  The consu...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  The consu...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  The consu...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski

Calculations

A Better
App...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  Across al...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  Across al...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  Across al...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  Across al...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski
                  Across al...
Demand and Revenue Curves
                                              Expected Revenue
              $    0          $1,...
Methodology
                (Continued)

 Technical
Memorandum        Elasticities can also be calculated. Several possibl...
Methodology
                (Continued)

 Technical
Memorandum        Elasticities can also be calculated. Several possibl...
Methodology
                (Continued)

 Technical
Memorandum        Elasticities can also be calculated. Several possibl...
Methodology
                (Continued)

 Technical
Memorandum        Elasticities can also be calculated. Several possibl...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski

Calculations

A Better
App...
Methodology
                (Continued)

 Technical
Memorandum        A better analysis approach is to recognize that the ...
Methodology
                (Continued)

 Technical
Memorandum        A better analysis approach is to recognize that the ...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski       Revenue is estimated ...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski       Revenue is estimated ...
Methodology
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski       Revenue is estimated ...
Technical
Memorandum
  2009:003

    W.R
 Paczkowski



                                                       Part IV

  ...
Other Pricing Research Methodologies

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski


                  The Gabor ...
Other Pricing Research Methodologies
                (Continued)

 Technical
Memorandum
                  The Gabor Grange...
Other Pricing Research Methodologies
                (Continued)

 Technical
Memorandum
                  The Gabor Grange...
Other Pricing Research Methodologies
                (Continued)

 Technical
Memorandum
                  The Gabor Grange...
Other Pricing Research Methodologies
                (Continued)

 Technical
Memorandum
                  The Gabor Grange...
Other Pricing Research Methodologies
                (Continued)

 Technical
Memorandum
                  The Gabor Grange...
Other Pricing Research Methodologies
                (Continued)

 Technical
Memorandum
                  The Gabor Grange...
Other Pricing Research Methodologies
                (Continued)

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski


...
Technical
Memorandum
  2009:003

    W.R
 Paczkowski



                                                        Part V

  ...
Recommended Readings

 Technical
Memorandum
  2009:003

    W.R
 Paczkowski              Gabor, A.
                       ...
Technical
Memorandum
  2009:003

    W.R
 Paczkowski




                                                       Part VI

 ...
Technical
Memorandum
  2009:003

    W.R
                  Walter R. Paczkowski, Ph.D.
 Paczkowski




                  4...
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  1. 1. Technical Memorandum 2009:003 W.R Paczkowski 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
  2. 2. Technical Memorandum 2009:003 W.R Paczkowski W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 2 / 26
  3. 3. Technical Memorandum 2009:003 W.R Paczkowski Part I Technical Memoranda W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 3 / 26
  4. 4. Technical Memoranda Technical Memorandum 2009:003 W.R Paczkowski Data Analytics Corp. periodically issues technical memoranda on methodologies useful to those in the market research and predictive modeling communities. The memoranda also illustrate some of the analysis capabilities of Data Analytics Corp. Please feel free to send constructive comments and project inquiries to info@dataanalyticscorp.com W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 4 / 26
  5. 5. Technical Memorandum 2009:003 W.R Paczkowski Part II Introduction W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 5 / 26
  6. 6. Introduction Technical Memorandum 2009:003 A very important question all product managers must W.R Paczkowski eventually ask is: ”What price should I set for my product or service?” Price is the only marketing ”P” directly affecting the bottom-line.1 1 The marketing ”Ps” are price, product, promotion, place, position. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
  7. 7. Introduction Technical Memorandum 2009:003 A very important question all product managers must W.R Paczkowski eventually ask is: ”What price should I set for my product or service?” Price is the only marketing ”P” directly affecting the bottom-line.1 Knowing the demand curve is critical for setting price. 1 The marketing ”Ps” are price, product, promotion, place, position. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
  8. 8. Introduction Technical Memorandum 2009:003 A very important question all product managers must W.R Paczkowski eventually ask is: ”What price should I set for my product or service?” Price is the only marketing ”P” directly affecting the bottom-line.1 Knowing the demand curve is critical for setting price. An equally important item is the price elasticity. 1 The marketing ”Ps” are price, product, promotion, place, position. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
  9. 9. Introduction Technical Memorandum 2009:003 A very important question all product managers must W.R Paczkowski eventually ask is: ”What price should I set for my product or service?” Price is the only marketing ”P” directly affecting the bottom-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. 1 The marketing ”Ps” are price, product, promotion, place, position. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
  10. 10. Introduction Technical Memorandum 2009:003 A very important question all product managers must W.R Paczkowski eventually ask is: ”What price should I set for my product or service?” Price is the only marketing ”P” directly affecting the bottom-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 revenue that can be earned. 1 The marketing ”Ps” are price, product, promotion, place, position. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 6 / 26
  11. 11. Introduction (Continued) Technical Memorandum The Gabor Granger pricing methodology is an old method for 2009:003 determining a demand curve for a product. The price elasticity W.R Paczkowski and revenue curve can then be derived. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 7 / 26
  12. 12. Introduction (Continued) Technical Memorandum The Gabor Granger pricing methodology is an old method for 2009:003 determining a demand curve for a product. The price elasticity W.R Paczkowski and revenue curve can then be derived. The economists Clive Granger (2003 Nobel Memorial Prize in Economic Sciences) and Andr´ Gabor developed the e methodology in the 1960s. Since then, more sophisticated techniques have been developed. The Gabor Granger methodology is still occasionally used because of its intuitive appeal, but it is dated and not the best. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 7 / 26
  13. 13. Introduction (Continued) Technical Memorandum The Gabor Granger pricing methodology is an old method for 2009:003 determining a demand curve for a product. The price elasticity W.R Paczkowski and revenue curve can then be derived. The economists Clive Granger (2003 Nobel Memorial Prize in Economic Sciences) and Andr´ Gabor developed the e methodology in the 1960s. Since then, more sophisticated techniques have been developed. The Gabor Granger methodology is still occasionally used because of its intuitive appeal, but it is dated and not the best. See the section Other Pricing Research Methodologies below for a discussion of issues with Gabor Granger and other approaches that could be used. Also see other Data Analytics Corp. Technical Memorandum. Jump to Other Pricing Research Methodologies W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 7 / 26
  14. 14. Technical Memorandum 2009:003 W.R Paczkowski Calculations A Better Part III Approach Methodology W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 8 / 26
  15. 15. Methodology Technical Memorandum For pricing, consumers can be asked their willingness to buy a 2009:003 product at different price points W.R Paczkowski Calculations A Better Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
  16. 16. Methodology Technical Memorandum For pricing, consumers can be asked their willingness to buy a 2009:003 product at different price points W.R Paczkowski It is assumed that this querying will reveal the price point Calculations at which the consumer will no longer be interested in A Better buying the product Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
  17. 17. Methodology Technical Memorandum For pricing, consumers can be asked their willingness to buy a 2009:003 product at different price points W.R Paczkowski It is assumed that this querying will reveal the price point Calculations at which the consumer will no longer be interested in A Better buying the product Approach Consumers respond with a ”buy-not buy” response to each price. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
  18. 18. Methodology Technical Memorandum For pricing, consumers can be asked their willingness to buy a 2009:003 product at different price points W.R Paczkowski It is assumed that this querying will reveal the price point Calculations at which the consumer will no longer be interested in A Better buying the product Approach Consumers respond with a ”buy-not buy” response to each price. The method is sometimes called the ”buy-response method”. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
  19. 19. Methodology Technical Memorandum For pricing, consumers can be asked their willingness to buy a 2009:003 product at different price points W.R Paczkowski It is assumed that this querying will reveal the price point Calculations at which the consumer will no longer be interested in A Better buying the product Approach Consumers respond with a ”buy-not buy” response to each price. The method is sometimes called the ”buy-response method”. The constant querying enables the pricing analyst to trace out a demand curve. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
  20. 20. Methodology Technical Memorandum For pricing, consumers can be asked their willingness to buy a 2009:003 product at different price points W.R Paczkowski It is assumed that this querying will reveal the price point Calculations at which the consumer will no longer be interested in A Better buying the product Approach Consumers respond with a ”buy-not buy” response to each price. The method is sometimes called the ”buy-response method”. The constant querying enables the pricing analyst to trace out a demand curve. Once the demand curve is derived, a revenue curve can be overlayed to help determine the optimal price. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
  21. 21. Methodology Technical Memorandum For pricing, consumers can be asked their willingness to buy a 2009:003 product at different price points W.R Paczkowski It is assumed that this querying will reveal the price point Calculations at which the consumer will no longer be interested in A Better buying the product Approach Consumers respond with a ”buy-not buy” response to each price. The method is sometimes called the ”buy-response method”. The constant querying enables the pricing analyst to trace out a demand curve. Once the demand curve is derived, a revenue curve can be overlayed to help determine the optimal price. The optimal price is determined where the revenue curve is a maximum. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 9 / 26
  22. 22. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski Calculations A Better Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
  23. 23. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski The consumer is presented with a price for a product. Calculations A Better Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
  24. 24. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski The consumer is presented with a price for a product. Calculations The first price point sets a standard for comparing other A Better prices, so this point is often set at random or based on an Approach ”expected” price level. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
  25. 25. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski The consumer is presented with a price for a product. Calculations The first price point sets a standard for comparing other A Better prices, so this point is often set at random or based on an Approach ”expected” price level. Most studies start at a pre-determined price point. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
  26. 26. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski The consumer is presented with a price for a product. Calculations The first price point sets a standard for comparing other A Better prices, so this point is often set at random or based on an Approach ”expected” price level. Most studies start at a pre-determined price point. The consumer is then asked if he/she would buy the product at that price point. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
  27. 27. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski The consumer is presented with a price for a product. Calculations The first price point sets a standard for comparing other A Better prices, so this point is often set at random or based on an Approach ”expected” price level. Most studies start at a pre-determined price point. The consumer is then asked if he/she would buy the product at that price point. There is no ”standard” way to ask this question. Some possibilities are. . . W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
  28. 28. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski The consumer is presented with a price for a product. Calculations The first price point sets a standard for comparing other A Better prices, so this point is often set at random or based on an Approach ”expected” price level. Most studies start at a pre-determined price point. The consumer is then asked if he/she would buy the product at that price point. There is no ”standard” way to ask this question. Some possibilities are. . . ”Would you buy the product at this price?” W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
  29. 29. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski The consumer is presented with a price for a product. Calculations The first price point sets a standard for comparing other A Better prices, so this point is often set at random or based on an Approach ”expected” price level. Most studies start at a pre-determined price point. The consumer is then asked if he/she would buy the product at that price point. There is no ”standard” way to ask this question. Some possibilities are. . . ”Would you buy the product at this price?” ”How likely are you to buy this product at this price?” W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 10 / 26
  30. 30. Methodology (Continued) Technical Memorandum 2009:003 The approach involves asking a series of questions. . . W.R Paczkowski The consumer is presented with a price for a product. Calculations The first price point sets a standard for comparing other A Better prices, so this point is often set at random or based on an Approach ”expected” price level. Most studies start at a pre-determined price point. The consumer is then asked if he/she would buy the product at that price point. There is no ”standard” way to ask this question. Some possibilities 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
  31. 31. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski The consumer is then shown another price and the question is Calculations A Better repeated. Approach There are several ways to determine the next price to ask. . . W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 11 / 26
  32. 32. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski The consumer is then shown another price and the question is Calculations A Better repeated. Approach There are several ways to determine the next price to ask. . . Purely random selection W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 11 / 26
  33. 33. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski The consumer is then shown another price and the question is Calculations A Better repeated. Approach There are several ways to determine the next price to ask. . . Purely random selection Increase or decrease the price dependent on whether the respondent said they would or wouldn’t buy, respectively. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 11 / 26
  34. 34. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski The consumer is then shown another price and the question is Calculations A Better repeated. Approach There are several ways to determine the next price to ask. . . Purely random selection Increase or decrease the price dependent on whether the respondent 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
  35. 35. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Calculations A Better Approach Calculations W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 12 / 26
  36. 36. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Across all consumers, calculate the proportion responding favorably at each price point Calculations A Better Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
  37. 37. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Across all consumers, calculate the proportion responding favorably at each price point Calculations A Better Plot the proportions of consumers vs. price points Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
  38. 38. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Across all consumers, calculate the proportion responding favorably at each price point Calculations A Better Plot the proportions of consumers vs. price points Approach Also calculate the expected revenue per 100 people at each price point Revenue = (Percent Responding Favorably) · Price W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
  39. 39. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Across all consumers, calculate the proportion responding favorably at each price point Calculations A Better Plot the proportions of consumers vs. price points Approach Also calculate the expected revenue per 100 people at each price point Revenue = (Percent Responding Favorably) · Price Plot Revenue vs. price point W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
  40. 40. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Across all consumers, calculate the proportion responding favorably at each price point Calculations A Better Plot the proportions of consumers vs. price points Approach Also calculate the expected revenue per 100 people at each price point Revenue = (Percent Responding Favorably) · Price Plot Revenue vs. price point The optimal price is where the revenue curve is a maximum. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 13 / 26
  41. 41. Demand and Revenue Curves Expected Revenue $ 0 $1,000 $2,000 $3,000 $4,000 $5,000 $10 $8 $6 Optimal Price: $5 Price $4 $2 Demand Revenue $0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percent Responding Favorably
  42. 42. Methodology (Continued) Technical Memorandum Elasticities can also be calculated. Several possible ways are. . . 2009:003 W.R Paczkowski Calculations A Better Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 15 / 26
  43. 43. Methodology (Continued) Technical Memorandum Elasticities can also be calculated. Several possible ways are. . . 2009:003 W.R Calculate the mean percentage change in responses per Paczkowski percentage change in price. Calculations A Better Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 15 / 26
  44. 44. Methodology (Continued) Technical Memorandum Elasticities can also be calculated. Several possible ways are. . . 2009:003 W.R Calculate the mean percentage change in responses per Paczkowski percentage change in price. Calculations Estimate a simple linear (or linearized) model with A Better responses as the dependent variable and prices as the Approach independent variable. Response = β0 + β1 Price + W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 15 / 26
  45. 45. Methodology (Continued) Technical Memorandum Elasticities can also be calculated. Several possible ways are. . . 2009:003 W.R Calculate the mean percentage change in responses per Paczkowski percentage change in price. Calculations Estimate a simple linear (or linearized) model with A Better responses as the dependent variable and prices as the Approach independent variable. Response = β0 + β1 Price + The elasticity, η, would then be for this model. . . Price η = β1 · Response where X is the average. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 15 / 26
  46. 46. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Calculations A Better Approach A Better Approach W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 16 / 26
  47. 47. Methodology (Continued) Technical Memorandum A better analysis approach is to recognize that the response 2009:003 from each consumer is binary – buy or not buy. These W.R Paczkowski responses are better analyzed using a logistic regression model Calculations to model the probability of a randomly selected consumer A Better responding ”buy” to a particular price. The model is. . . Approach eZ Pr (Buy ) = 1 + eZ where Z = β0 + β1 Price W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 17 / 26
  48. 48. Methodology (Continued) Technical Memorandum A better analysis approach is to recognize that the response 2009:003 from each consumer is binary – buy or not buy. These W.R Paczkowski responses are better analyzed using a logistic regression model Calculations to model the probability of a randomly selected consumer A Better responding ”buy” to a particular price. The model is. . . Approach eZ Pr (Buy ) = 1 + eZ where Z = β0 + β1 Price 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
  49. 49. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Revenue is estimated as. . . Calculations Revenue = Addressable Market · Pr (Buy ) · Price A Better Approach where the Addressable Market is the number of consumers. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 18 / 26
  50. 50. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Revenue is estimated as. . . Calculations Revenue = Addressable Market · Pr (Buy ) · Price A Better Approach where the Addressable Market is the number of consumers. A simulator can be built to allow the marketing analyst to vary the price to gauge the effect on. . . 1 Units sold (= Addressable Market · Pr (Buy )) W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 18 / 26
  51. 51. Methodology (Continued) Technical Memorandum 2009:003 W.R Paczkowski Revenue is estimated as. . . Calculations Revenue = Addressable Market · Pr (Buy ) · Price A Better Approach where the Addressable Market is the number of consumers. A simulator can be built to allow the marketing analyst to vary the 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
  52. 52. Technical Memorandum 2009:003 W.R Paczkowski Part IV Other Pricing Research Methodologies W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 19 / 26
  53. 53. Other Pricing Research Methodologies Technical Memorandum 2009:003 W.R Paczkowski The Gabor Granger Pricing Method is old. The van Westendorp Price Sensitivity Meter is sometimes considered the next generation methodology beyond this one. See the Data Analytics Corp. Technical Memorandum #2009:001. Return . W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 20 / 26
  54. 54. Other Pricing Research Methodologies (Continued) Technical Memorandum The Gabor Granger Pricing Method has several major 2009:003 problems. . . W.R Paczkowski W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
  55. 55. Other Pricing Research Methodologies (Continued) Technical Memorandum The Gabor Granger Pricing Method has several major 2009:003 problems. . . W.R 1 It does not ask the consumer to trade-off price for other Paczkowski product attributes, a normal consumer decision W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
  56. 56. Other Pricing Research Methodologies (Continued) Technical Memorandum The Gabor Granger Pricing Method has several major 2009:003 problems. . . W.R 1 It does not ask the consumer to trade-off price for other Paczkowski product attributes, a normal consumer decision The preferred pricing research methods allow trade-offs W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
  57. 57. Other Pricing Research Methodologies (Continued) Technical Memorandum The Gabor Granger Pricing Method has several major 2009:003 problems. . . W.R 1 It does not ask the consumer to trade-off price for other Paczkowski product 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 very important. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
  58. 58. Other Pricing Research Methodologies (Continued) Technical Memorandum The Gabor Granger Pricing Method has several major 2009:003 problems. . . W.R 1 It does not ask the consumer to trade-off price for other Paczkowski product 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 very important. 3 Consumers are not given a reference frame for answering the questions. Research shows they need a consistent reference frame. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
  59. 59. Other Pricing Research Methodologies (Continued) Technical Memorandum The Gabor Granger Pricing Method has several major 2009:003 problems. . . W.R 1 It does not ask the consumer to trade-off price for other Paczkowski product 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 very important. 3 Consumers are not given a reference frame for answering the questions. Research shows they need a consistent reference frame. 4 Most consumers do not consider buying a product at a single price – a make or break price point – but instead are willing to buy within a range of prices, and Gabor Granger does not allow for a range. W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 21 / 26
  60. 60. Other Pricing Research Methodologies (Continued) Technical Memorandum 2009:003 W.R Paczkowski These other pricing research methodologies are described in three other Data Analytics Corp. Technical Memoranda W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 22 / 26
  61. 61. Technical Memorandum 2009:003 W.R Paczkowski Part V Recommended Readings W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 23 / 26
  62. 62. Recommended Readings Technical Memorandum 2009:003 W.R Paczkowski Gabor, A. Pricing: Concepts and Methods for Effective Marketing 2nd edition. Gower Publishing Haqmpshire, U.K. (1988) Monroe, K. Pricing: Making Profitable Decisions 2nd edition McGraw-Hill Publishing Co. New York (1990) W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 24 / 26
  63. 63. Technical Memorandum 2009:003 W.R Paczkowski Part VI Contact Information W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 25 / 26
  64. 64. Technical Memorandum 2009:003 W.R Walter R. Paczkowski, Ph.D. Paczkowski 44 Hamilton Lane Voice: 609-936-8999 Plainsboro, NJ 08536 Fax: 609-936-3733 www.dataanalyticscorp.com info@dataanalyticscorp.com W.R Paczkowski (Data Analytics Corp. ) Technical Memorandum 2009:003 September 25, 2009 26 / 26
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