One could argue that consumers are constantly playing their own version of The Price Is Right.
At any given time, they have a clear sense of what they are willing to pay for a particular product—and what price represents a bridge too far.
Aptly, in behavior science and in the business world, this is called willingness to pay. Understanding the concept of willingness to pay and its many implications is vital to pricing products in a way that strikes an ideal balance; you don’t want to charge too little and leave profits on the table, but neither do you want to charge too much and discourage potential customers from opening up their wallets.
This is critical because you definitely don’t want to find out that your prices are too high after your product is already out in the world. To head that off, willingness to pay surveys are the most effective tools to identify clear pricing parameters before the price sticker hits your product.
Willingness to pay, sometimes abbreviated as WTP, is the maximum price a customer is willing to pay for a product or service. While potential customers are likely willing to pay less than the willingness to-pay threshold, in most cases, they won't pay a higher price. Typically, willingness to pay is represented by a dollar figure, but in some cases, it can be a price range.
The importance of nailing down your customers’ willingness to pay takes on considerable urgency when you consider that 1 in 2 B2C consumers and 2 in 5 B2B consumers say that price is one of their top three considerations when making a purchase decision.
Beyond willingness to pay, companies need to understand the concept of willingness to accept.
While willingness to pay focuses on what a consumer is willing to give—willingness to accept refers to what you, the seller, can afford to accept for your good or service.
These two concepts intersect at the transaction cost, which will be any point between a buyer's willingness to pay and a seller's willingness to accept. This is the sweet spot that keeps the wheels of commerce turning.
As mentioned, surveys are a critical tool in getting pricing right and identifying the willingness to pay threshold for any product or service. Through willingness to pay surveys, companies can go to market with confidence that a product is priced in a way that encourages consumers to buy, while still maximizing profits. Willingness to pay surveys can also help companies adjust prices based on changing trends or other external factors that might be impacting consumer buying behaviors.
Because money can be a sensitive topic, it’s important that you carefully consider how you ask about willingness to pay in surveys. There are also some key considerations that can help you make sure you are getting the most accurate data and feedback via your surveys. Here are 2 factors to be aware of as you create your willingness to pay surveys:
Because open-ended questions give respondents an open road to answer questions in their own words, they can lead to all kinds of willingness to pay insights. An example would be the open-ended question “How much would you expect this product/service to cost?” with a text box for respondents to fill in their own answer. Depending on how much you know about your product’s demand, your target market, and other related factors, the qualitative results from an open-ended question like this may surprise you and lead to new pricing considerations.
Open-ended questions work particularly well in willingness to pay surveys that are focused on a new product or service. For instance, if consumers don’t have a set idea on how much your product or service costs, then open-ended questions will allow you to gauge expectations of how much your target audience might be willing to pay, without prompting them with certain answer choices.
Open-ended questions can be ideal when you want to enhance things like:
Keep in mind, because of the freedom of open-ended responses, these questions are considered more challenging to analyze than closed-ended questions. However, text analysis features such as sentiment analysis and world clouds are a powerful way to quickly home in on customer sentiment related to willingness to pay.
Closed-ended questions provide respondents with predetermined answer options; in willingness to pay surveys, these might include specific price points or several different price ranges. Because closed-ended questions are used to collect concrete results and detect trends, they can be useful for answering particular pricing questions and gaining high-level insights.
Asking “How much would you expect this to cost?” as a closed-ended question would require several answer options, as opposed to an open-ended text box. It’s also important to consider:
There are often instances in which the efficiency and clarity provided by closed-ended questions makes the most sense for willingness to pay surveys. While open-ended expected cost questions are usually preferable because you are not in any way “leading the witness,” closed-ended questions are ideal in situations in which you are limited in the possible price points you can charge. For example, perhaps you have already determined that your service will be offered at one of three price points, and you are looking for direction on which one most people are willing to pay. Using a price testing template can offer a shortcut to presenting closed-ended questions with limited, predetermined options.
Closed-ended questions questions can be particularly useful when your exploration of willingness to pay involves:
High consumer price sensitivity means that there is a strong relationship between the price and customer demand. When the price increases substantially, sales will fall. In contrast, if the item price is too low, sales may remain largely unaffected by a change in price.
When it comes to analyzing closed-ended responses in willingness to pay surveys, be sure to take advantage of features like cross-tabulation and benchmarking, which will help you distill pricing data and make easier, faster decisions.
Van Westendorp’s Price Sensitivity Model is a multi-question model that has proven to be an effective way to indirectly measure willingness to pay instead of directly posing the question to potential buyers.
Rather than asking potential buyers to identify a single price point, the Van Westendorp model helps assess a range of prices.
For this pricing model to work its magic, the following four questions must be posed at the end of the survey:
The Van Westendorp model is highly effective in gauging consumer sentiments about a potential range of prices. By moving away from just a single question regarding pricing, bias is reduced and you get a more comprehensive perspective on the price range consumers are willing to pay for a product or service.
If you want your products and services to sell—and sell in ways that are profitable—it’s critical that you land on that sweet spot where the price is right. Using willingness to pay surveys makes both you and your customers winners. To get started, sign up for a free SurveyMonkey account.