Full Answer
This is why understanding Willingness to Pay is so important. What is willingness to pay? Willingness to Pay (or WTP) is just that… the highest amount your customer is willing to pay for a product or service. It’s generally expressed as a range to represent different people’s opinions and also the fluctuation over time.
What Is Willingness To Pay? The maximum price a customer is willing to pay for a product or service is known as the "willingness to pay," or "WTP," acronym.
Assessing consumers’ willingness to pay also plays a role in developing competitive strategies, new products, and value audits. Although hypothetical WTP can lend helpful insight to consumer demand, it should not be the only element involved in setting the right price for a good or service.
Context has a heavy influence on WTP. For example, a consumer will be more willing to pay for an expensive glass of wine on a vacation in Sonoma Valley than at a quick, casual restaurant at home. Assessing consumers’ willingness to pay also plays a role in developing competitive strategies, new products,...
One of my favorite techniques, which I believe works very well, is the Van Westerndorp method, also known as the Price Sensitivity Meter technique.Its a series of 4 simple questions you can ask your customers to determine a price range at which your product pricing matches your offering's real value.
These are a few of the more popular ways to gauge willingness-to-pay in a market research survey. There are other more complicated formats, but it can be difficult to know when to apply these formats given the specifics of the product/service being presented, the sample size, and the decisions that need to be made using this survey data.
The best way to measure WTP is real pricing experimentation. You can make hypotheses and test them with direct and indirect methods, but there are inherent drawbacks to every method that doesn’t involve taking a credit card number. The reality of this method is that it will likely take you some time to settle on that magic price that nets you both high conversion rates and high margins, and even longer if you’re selling to different verticals, each with their own WTP range.
One particularly tricky note about perceived value is a concept whose name I learned from a libertarian (read: hobby economist) friend of mine, the Giffen Good (or less commonly and more accurately referred to as a Veblen Good ), a product whose perceived value increases as the price increases. It may be counterintuitive to a young entrepreneur who thinks the price can give them a competitive edge, but raising your price might actually increase the amount your customers are willing to pay.
RepOne Strength is building the automated personal trainer for everyone. Their first product enables coaches to individualize training for every athlete on their team, coaches put their sensors and a tablet on each station, upload their roster and workout programs, and RepOne’s system helps them customize training for each of their athletes. I had the pleasure of asking their CEO, Jordan Berke, about how to determines a customers WTP, how his startup measures it and recommendations for other founders navigating the early stages of building a startup. You can read Jordan’s comprehensive responses below:
A method that’s gained popularity over the past decade or so is variable pricing, where you closely monitor conversion analytics while changing your pricing and isolating your independent variable. Unfortunately, this can be a complex and involved process, potentially requiring A/B testing and order volumes high enough to increase your signal to noise ratio.
A yes + enthusiasm might be enough for you to make a decision to start building a product, and it can take surprisingly little to get there. Common pre-engineering strategies for binary WTP: Direct surveying — ask potential customers. Indirect analysis — comparables.
Their budgets generally roll over at the same time of the year, which significantly impacts their buying choices. Weight room budgets vary greatly, and some have no budget at all, meaning they need to formally request each purchase. Although the S&C Coach makes spending decisions, they need buy-in from several levels, at times all the way up to their county school board. Some schools don’t have an S&C coach at all, and some hi re companies to manage their programming remotely.
Assessing consumers’ willingness to pay also plays a role in developing competitive strategies, new products, and value audits. Although hypothetical WTP can lend helpful insight to consumer demand, it should not be the only element involved in setting the right price for a good or service.
Direct Approach: The direct approach of determining WTP involves questioning consumers directly to ask what they would be willing to pay for a certain product. One method are open-ended (OE) questions, where the goal is to understand consumer’s personal values to better assess their willingness to pay.
Real, actual WTP cannot be determined for several reasons: 1 Unknown. If the product is particularly innovative and unseen, the consumer has no way of knowing what value the product will have to them. 2 Subjective. Value is a concept, and thus a subjective variable to measure. 3 Context has a heavy influence on WTP. For example, a consumer will be more willing to pay for an expensive glass of wine on a vacation in Sonoma Valley than at a quick, casual restaurant at home.
All approaches to measure a consumer’s willingness to pay are widely considered as biased and inaccurate for psychological, contextual, and technical reasons. The main issue with these approaches of measurement is that they are executed within hypothetical circumstances.
If the demand flexibility is low, then the consumer may be willing to pay a higher price. Thus, WTP is conditional on the type of a certain good or service.
The best way to measure WTP is real pricing experimentation. You can make hypotheses and test them with direct and indirect methods, but there are inherent drawbacks to every method that doesn’t involve taking a credit card number. The reality of this method is that it will likely take you some time to settle on that magic price that nets you both high conversion rates and high margins, and even longer if you’re selling to different verticals, each with their own WTP range.
One particularly tricky note about perceived value is a concept whose name I learned from a libertarian (read: hobby economist) friend of mine, the Giffen Good (or less commonly and more accurately referred to as a Veblen Good ), a product whose perceived value increases as the price increases. It may be counterintuitive to a young entrepreneur who thinks the price can give them a competitive edge, but raising your price might actually increase the amount your customers are willing to pay.
RepOne Strength is building the automated personal trainer for everyone. Their first product enables coaches to individualize training for every athlete on their team, coaches put their sensors and a tablet on each station, upload their roster and workout programs, and RepOne’s system helps them customize training for each of their athletes. I had the pleasure of asking their CEO, Jordan Berke, about how to determines a customers WTP, how his startup measures it and recommendations for other founders navigating the early stages of building a startup. You can read Jordan’s comprehensive responses below:
A method that’s gained popularity over the past decade or so is variable pricing, where you closely monitor conversion analytics while changing your pricing and isolating your independent variable. Unfortunately, this can be a complex and involved process, potentially requiring A/B testing and order volumes high enough to increase your signal to noise ratio.
A yes + enthusiasm might be enough for you to make a decision to start building a product, and it can take surprisingly little to get there. Common pre-engineering strategies for binary WTP: Direct surveying — ask potential customers. Indirect analysis — comparables.
Their budgets generally roll over at the same time of the year, which significantly impacts their buying choices. Weight room budgets vary greatly, and some have no budget at all, meaning they need to formally request each purchase. Although the S&C Coach makes spending decisions, they need buy-in from several levels, at times all the way up to their county school board. Some schools don’t have an S&C coach at all, and some hi re companies to manage their programming remotely.