Willingness to Pay: What It Is and How to Measure It

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 various factors that influence a customer’s willingness to pay and three methodologies of discovering WTP, as well as the pros and cons of each.

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
  • Seasonal and market trends
  • Location of the customer
  • Competitive value and product differentiation
  • Product quality

What are some methodologies of calculating WTP?

Given the complexity of calculating WTP due to multiple factors, there is no one formula. Conjointly recommends three methodologies, each with their own advantages and limitations.

MethodologiesGabor-GrangerVan WestendorpConjoint Analysis
When To UseDetermine price points for existing productsDetermine price range for existing or new productsAssess features other than prices of multiple products
AdvantagesStraightforward approach of questioningRelatively easy to programOffers more insights into customers’ decision-making process
LimitationsDoes not consider competitive pricingRespondents need to have some knowledge of market offeringsRequires high level of expertise

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.

Price elasticity of demand curve

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 4 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
Acceptable range of prices

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.

Conjoint analysis

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.

FAQs

Is willingness to pay same with the marginal willingness to pay (MWTP)?

No, they are not the same. Marginal willingness to pay (MWTP) is the indicative amount of money your customers are willing to pay for a particular feature of your product (i.e., how much your customers are ready to pay for an upgrade from feature A to feature B, in addition to the price they are already paying now). The word ‘marginal’ refers to the fact that MWTP is always relative to a baseline, which is your baseline product (with various baseline features specified).

Does consumers' willingness to pay change over time?

Yes. Changes in consumers’ income and economic environment, such as inflation, affect consumers’ willingness to pay. Subject to the nature of products and services, consumers may react differently in terms of demand and their willingness to pay.

Written on 19 April 2022 by:
Nurul Ashiqin Zainal Abidin image
Nurul Ashiqin Zainal Abidin
Insights Writer

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