Determine what your customers are willing to pay for a particular product or service using common pricing research methodologies.
What is willingness to pay?
Willingness to pay (WTP) is the maximum amount of money a customer is willing to pay for a product or service. It is a common metric measured in pricing research studies, which helps businesses to set optimum prices for their products and services to attract customers while maximising their profits.
This article discusses the difference between WTP and marginal willingness to pay, various factors that influence a customer’s willingness to pay, three methodologies of discovering WTP, as well as the pros and cons of each.
Difference between willingness to pay and marginal willingness to pay
The willingness to pay is not the same as the marginal willingness to pay (MWTP). As the term ‘marginal’ suggests, MWTP is the indicative amount of money your customers are willing to pay for a particular feature of your product relative to a specified baseline (i.e. how much your customers are willing to pay for an upgrade from feature A to feature B, in addition to the price they are already paying).
What are the factors influencing WTP?
WTP varies depending on the context, different demographics, the specific customer in question, and can fluctuate over time. Some common factors that can influence WTP include:
- State of the economy, such as inflation
- Seasonal and market trends
- Location of the customer
- Competitive value and product differentiation
- Product quality
- Advertisements
What are some methodologies of calculating WTP?
Given the complexity of calculating WTP due to multiple factors, Conjointly recommends three methodologies, each with their own advantages and limitations.
| Methodologies | Gabor-Granger | Van Westendorp | Conjoint Analysis |
|---|---|---|---|
| How it works | Identify the maximum price each respondent is willing to pay to determine demand at different price points and the revenue-maximising price point. | Identify each respondents' "too cheap","cheap","expensive", and "too expensive" price levels to determine acceptable price range. | Identify the marginal willingness to pay for specific features and determine the optimal pricing of products while considering competitor offerings. |
| Advantages | Simple questions focussing on pricing. | Discrete-choice experiment that offers more insights into consumer trade-off decisions. | |
| Limitations |
| Respondents have to evaluate price in conjunction with other features, rather than considering price independently. | |
Gabor-Granger Pricing Method
The Gabor-Granger method asks the respondents if they would buy a product or service (usually in a binary fashion. i.e. Yes / No) at a specific price. Researchers would then be able to determine whether the respondents would purchase the product if the price is increased or decreased.
This direct pricing technique uses the results to determine demand at certain expected price points, which can then be used to determine an optimal price point within the market.
Van Westendorp’s Price Sensitivity Meter
Van Westendorp’s Price Sensitivity Meter is used to build a range of acceptable prices for a given item with the following questions:
- At what price would you begin to think the product is too expensive to consider?
- At what price would you begin to think the product is so inexpensive that you would question the quality and not consider it?
- At what price would you begin to think the product is getting expensive, but you still might consider it?
- At what price would you think the product is a bargain – a great buy for the money?
Van Westendorp will generate a set of ranges as well as an optimal price.
- Lower threshold – intersection of too inexpensive and expensive
- Upper threshold – intersection of too expensive and not expensive
- Optimal price point – intersection of too expensive and too inexpensive
For a better understanding of the differences between Gabor-Granger and Van Westendorp, check out this illustrative case study that employs and compares both methods.
Conjoint Analysis
Conjoint analysis is a powerful pricing research tool that involves breaking down a product into its components (features and prices), which are then combined into several configurations for the respondents to choose. This method allows the researchers to determine the influence of price and product features on customers’ willingness to pay.
In addition, this line of research ensures the relevance and reliability of the insights obtained from the analysis, as the trade-off scenarios in the questions mimic real-world experiences that consumers often face when making decisions to purchase a product or service. This way, researchers would be able to understand the preference and importance that customers place on a particular product based on its features and price.
Benefits of measuring WTP in multiple ways
Consumer willingness to pay is influenced by various factors and can change over time. It is more practical to approach it as a range of acceptable prices instead of a fixed amount.
Combining different methods of measuring willingness to pay provides a more accurate price range, enabling you to make better pricing decisions. A common way to achieve this is by adding a Van-Westendorp or Gabor Granger question to a Brand-Specific Conjoint survey.
Talk to an expert about customers’ willingness to pay
Want to set optimal price points to attract customers and maximise your profits? Conjointly’s team of research experts are here to help.
