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.
| Methodologies | Gabor-Granger | Van Westendorp | Conjoint Analysis |
| When To Use | Determine price points for existing products | Determine price range for existing or new products | Assess features other than prices of multiple products |
| Advantages | Straightforward approach of questioning | Relatively easy to program | Offers more insights into customers’ decision-making process |
| Limitations | Does not consider competitive pricing | Respondents need to have some knowledge of market offerings | Requires 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.
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
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.
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.
