What is willingness to pay and how to calculate it

What is willingness to pay and how to calculate it

05/08/2020 - Pricing strategy

Willingness to pay is a key concept when it comes to defining a pricing strategy that’s both competitive and effective. This is the maximum price that customers are willing to pay for a product or service. Knowing this will allow eCommerce businesses to design their future sales strategies, establish the prices for new products and services, and launch promotions with guaranteed success. In other words, it constitutes the starting point from which to define the most appropriate prices at all times.

Willingness to pay (or WTP) can vary based on multiple factors such as market trends, positioning, and the prices of the competition. Because of this, you must study and analyse the WTP periodically, in each quarter of economic activity. Thanks to the many changes that can take place in the market, the WTP is generally expressed as a set of numbers with an upper and a lower limit. This will give you a range of maximum prices that the customers are willing to pay. But, how is it calculated?

An in-depth study of your customers and competitors

Defining the appropriate value for products and services and identifying your WTP implies conducting a thorough investigation into the behaviour and preferences of your customers in particular. One way to do so is by using surveys. Including surveys in the purchase confirmation email or on the screen at the end of the purchase process will allow you to collect information on customer satisfaction with your prices and increase their engagement with the company by making them feel that you value their opinion. With this data, eCommerce businesses can get an idea of the maximum prices that their users are willing to pay.

On the other hand, the value of the WTP also depends on the behaviour of the competition. For that, it’s essential to know their prices for products and services as well as their level of customer success. This is very useful information that you can use when designing your own pricing strategy.

Given the complexity of analysing the entire catalogue of their various competitors, for eCommerce businesses, there is software that allows these tasks to be carried out quickly and automatically. Through the implementation of competitor tracking systems and online store monitoring, it’s possible to collect data about their presence on B2B websites, on price comparison sites like Google Shopping, and in marketplaces like Amazon and eBay.

Additional factors to keep in mind when calculating the willingness to pay

  • The economic context: when the economy is in a period of growth, the WTP tends to be higher. At the same time, in a moment of recession, it tends to decrease, especially for products that aren’t essential. For this reason, companies must also be aware of economic changes at the national and global levels.
  • The seasonality of certain products: in the case of products or services that are sold in greater quantities at certain times of the year, like costumes for Carnival or package holidays, the WTP will vary according to the date of sale. These fluctuations are usually easy to track and will repeat periodically every year, provided that no unexpected events occur.
  • The availability of products and services: the harder a product is to get, the more valuable it becomes. If customers feel that a product is rare, exceptional or scarce in other eCommerce businesses, its WTP will increase.
  • The quality of a product or service: the user’s perception of the quality of a product directly affects their willingness to pay. That’s why it’s important not only to work on your pricing strategy but also to guarantee the quality of the items for sale. The satisfaction of your customers will be the deciding factor in the success of your eCommerce business.

Category: Pricing strategy

Tags: ecommerce, wtp, competition, willingness to pay, pricing

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Angela
Angela de la Vieja
Content Manager

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