Willingness to pay: What it really means & how to influence it

ProfitWell May 2 2021

Anyone whose taken an economics class has heard of supply and demand. Producers want to charge a lot, consumers want to pay a little, and the happy medium that exists is what products are typically priced at. Central to pricing your products at that optimum rate is understanding your target market's willingness to pay. This post will discuss what willingness to pay means, some steps you can take to calculate it, and how you can use this number to drive growth.

 

 

What is willingness to pay (WTP)?

Willingness to pay is exactly what it sounds like: the amount that a customer base is willing to pay for a product or service. Beyond the raw definition, there are a few important things to understand about this vital metric. First, it's not an exact number. Willingness to pay is usually expressed as a range. This is due, in part, to the fact that you're dealing with many people with various ideas on what they are willing to pay. But it's also because willingness to pay fluctuates over time.

 

Why there is no willingness to pay formula and how to calculate it anyway

One of the big issues with any problem of economics is that humans aren't entirely rational. If you ask 100 people what they'd be willing to pay for a product, you're likely to get 100 different answers. There's no formula that can be plugged into that will account for that. But that doesn't mean you can't calculate willingness to pay. Three factors to getting an accurate WTP range are described below. 

 

Market research

While we're talking about basic economics, we need to discuss the fact that competition tends to drive prices down. If you are the only company in your space selling a product, you can set your prices reasonably high. If the market is oversaturated already, you won't be able to charge much higher than competitors of near equal value. Market research surveys the market that exists for a product, and the competitive landscape that exists around it.  This can help give you an idea of how much leeway you have in your pricing.

 

Customer research

The market for a product may be great, but that doesn't mean the market for your product is great. The features that your product offers to consumers need to line up with the features that those consumers value the most. This is a very important part of willingness to pay because it takes the calculation away from generic product categories and into something with a more measurable value. A product that fits the market better will enjoy a higher willingness to pay than one that doesn't.

 

Direct / indirect surveys

The use of surveys, direct or indirect, is a great way to gather information about what customers want, how much they value a given feature, how loyal they are to you or your competitors, and many more data points that can be used to provide an internal baseline when calculating the willingness to pay for your target customer base.

 

What willingness to pay really means

So, we've given the dictionary meaning of willingness to pay: it means exactly what it says. But what does it really mean? In other words, how does this simple concept impact your business? In what ways can you use this number to form actionable insights regarding your business? Let's now take a look at how willingness to pay has an actual impact on your business.

 

How willingness to pay reflects market demand

We talked about supply and demand curves earlier. Generally speaking, the more demand there is for something, the more people will be willing to pay for it. This means that tracking the willingness to pay for your product over time also serves as a sort of proxy for tracking the market demand for that product. Company-wide, this can be very helpful because it allows you to see which products, or features of a product, are worth pursuing and which may not be good investments. 

 

How willingness to pay drives pricing strategy

Willingness to pay will help you decide the appropriate pricing strategy. But it goes beyond that, particularly for SaaS companies. For example, if you have tiered pricing, which features go in which tier? It might seem obvious, but it's not as simple as placing the features with the lowest willingness to pay in the lowest tier, and the ones with the highest willingness to pay in the highest. There's more to how you decide what and how you charge for certain features. And without the data to make informed decisions, many SaaS companies end up giving away features they should be charging for, or tying their monetization strategy to features that people aren't as likely to break out the wallet for. 

 

How willingness to pay drives product development

As you've probably already considered, understanding what features and products people are willing to pay for doesn't just influence where you put a feature into your pricing tier. It also helps you to understand which products and features you should be focusing your time on. As a reflection of market demand, willingness to pay tells you which direction your product development should go in, helping to ensure that you are always driving your product towards growth for your business. 

 

How to influence willingness to pay

Here, we'd like to expand upon two things that we've mentioned previously. Willingness to pay isn't static, and it is tied to your specific product and how it fits into the market. These are two useful bits of information because they mean that you have some power to influence willingness to pay. Let's take a look at the actions you can take to increase your customer base's willingness to pay.

 

Value proposition influences willingness to pay

A huge mistake companies make is failure to articulate their value proposition. What makes your product better than the competition? Why should customers buy your product instead of the other offerings. You can even use existing willingness-to-pay calculations to decide which features are most valued, but when you have that information, you need to convey it to customers. Your value proposition has to be a driving part of your marketing because it's what convinces customers that your product is worth their money.

 

Brand awareness boosts willingness to pay

In many cases, the only difference between generic and name brand is the price. Yet people are still willing to pay a premium for name-brand products. This is a perfect example of the effect that brand awareness has on willingness to pay. It also tells you the importance of building your own brand recognition. And aligning your value proposition with your branding is a great way to differentiate yourself. 

 

Influencer marketing & social proof increases willingness to pay

No company has ever said, "Our product is horrible, go buy the competition." So when you tell potential customers how wonderful your product is, there's a limit to what they'll believe. If your value proposition is strong, they'll believe in that. But as a more general perception of your product, they aren't taking your opinion into account. The facts you present matter. The opinions of others matter. This is why social proof and influencer marketing play such a big role in shaping customer perceptions of your product. And, by extension, their willingness to pay.

 

Willingness to pay isn't the only metric you need to measure

Willingness to pay is a great tool for helping you reach the right price point, to determine your details of your pricing strategy, and even to drive a product development strategy. However, it is one of many metrics that are important to SaaS business. Profitwell Metrics can help you track them all. For example, customer acquisition cost and customer lifetime value combine to tell you how much you can afford to spend on marketing. Churn rate will tell you how many customers you are losing and customer satisfaction and success metrics will help you keep more of them around for longer. In many ways, the needs of SaaS companies are unique, and Profitwell Metrics was designed with them in mind. 

 

Willingness to pay FAQ

What does willingness to pay mean?

Willingness to pay is the maximum amount a customer is willing to pay for your product or service. It is presented as a range of price values to account for differing opinions among customers and normal market fluctuations. 

 

Is willingness to pay the same as market demand?

Willingness to pay isn't identical to market demand, but they are related concepts. In fact, some people do refer to the demand curve as a willingness to pay curve. The difference is that a curve is going to represent everyone's willingness to pay. As a business setting pricing and determining strategy, you are more interested in the range that represents average or mean willingness to pay. 

 

What is the difference between willingness to pay and willingness to accept?

If we can call the demand curve willingness to pay, then we can also call the supply curve willingness to accept. That is to say, the willingness to pay is the most that a customer will pay for a product. The willingness to accept is the lowest amount you can afford to sell it for. 

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