What is the right price for a new product about to be launched? Or an existing service that you want to increase the price for a number of reasons?
The fact is that 88% of the time, the pricing process within a company is largely based on intuition rather than science. Define willingness to pay with your customers!
So, how do you ensure that your prices are set correctly? How do you know how much your customers are willing to pay for your product or service?
It takes more to succeed than you think. Creating a balanced strategy depends on a clear understanding of what affects willingness to pay. You also need to know how to calculate your willingness to pay in order to determine your optimal price and maximize your income.
What is willingness to pay?
Willingness to pay is the ideal amount a customer is willing to pay for your product or service. It varies depending on a number of factors, but it is one of the best ways to conceptualize overall demand at a given time.
Because of this variability, willingness to pay is usually expressed with a range of upper and lower limits. This delta is called the "acceptable price range".
Willingness to pay / accept
Willingness to pay is often confused with willingness to accept. It is the highest price at which a customer will be willing to buy.
Willingness to accept is the lowest price you can afford to sell your product or service.
In this article, don't panic, we are talking about your customers and how to determine their willingness to pay and optimize your pricing strategy.
5 factors that affect willingness to pay
1. The state of the economy
When the economy is doing well, it is likely to grow. A general recession or problems specific to your industry will cause it to decline. Consistent, you might say!
2. The trend and season of a product
The trend is difficult to monitor, but affects the willingness to pay significantly. What is in vogue is variable and specific to the market in which you work.
A trendy item will have a huge willingness to pay (WTP) while the opposite will be true for an outdated or obsolete item. Seasonality can also be considered for WTP evolution. During the holiday season, the WTP of "gift" products will be higher than in the classic period.
It is therefore essential to survey its market regularly to adjust its prices and strategy throughout the year.
3. Your brand image
Each customer has a different personal story that explains how he or she perceives the price. While it is impossible to consider each client's possible history, you can examine how different aspects of your industry directly impact the client and their perceived value of your offers. (CSR, positioning, communication...). Year-round promotions will devalue the overall willingness to pay, for example. Your brand image is one of the main components Pay attention to your brand image!
4. The rarity of a product
The rarer it is, the more precious it is. So far, nothing new. The same goes for willingness to pay. If your customers perceive the product or service you sell as rare, it will increase their willingness to pay.
While this can be used to your advantage, increasing the rarity of a product can make it inaccessible to some customers. Always survey your customers and prospects to ensure that you are not setting a price that is out of their purchasing range. Pay attention to your positioning!
5. The quality of a product
Consumer perception of quality has a direct impact on WTP, in the same way that scarcity has a direct impact on WTP. The higher the quality, the higher the willingness to pay.
Example between Disney Video and Netflix on a base of 8,412 respondents.
How to find the ideal price?
Already, it is important to know that the 'ideal' price does not exist, or at least, it is constantly changing. To optimize your sales, you must constantly survey your market to adapt the price of your products or services according to multiple variables: economy, trend, perceived value of the customer...
So, how do we collect this data?
1. Know your personas
Customers with more regular use of the product or service will have a different willingness to pay. Segmenting your willingness-to-pay data according to this style of factors is critical. It provides you with an excellent way to create prices tailored to your target audience and, most importantly, to develop a clearer and more personalized pricing strategy. Knowing the perceived value of your product through your customers is a major asset in refining your marketing - pricing strategies.
2. Market data
Whether you are new to the industry or an established brand, the market has a direct impact on willingness to pay. Find out how your competitors rate their products and you can create an excellent baseline for finding your own WTP.
Competitive research is the basis for starting your pricing strategy. However, it is the least relevant because you are different from your competitors and the perceived value of your products or services from your customers will be different from your competitors. The same goes for willingness to pay...
3. Client Surveys / Hearings
Surveys are the best tool you have to find out what your consumers are thinking and thus assess their willingness to pay. Having direct feedback from your customers, on a future product for example, is an ultra powerful piece of information. Creating 2.0 surveys, simple and engaging for your prospects and customers, allows you to collect the data that will be the basis of the success of your marketing and price strategies.
For example, you can use klack gaming surveys, perfect for determining the willingness to pay of your current or future customers and refine your pricing strategy.
Example of companies and their willingness to pay
Here are two examples of how Amazon and Spotify have refined their pricing strategy through consumer willingness to pay surveys.
Spotify's standard plan is $9.99 per month, which is perfectly in line with the overall willingness to pay of the 7,458 respondents:
Overall willingness to pay - Spotify
What's interesting is the size of a range. Based on our data, Spotify customers are willing to pay between $5 and $15 for their monthly subscription. This indicates that it is possible to differentiate with some additional price points. Which Spotify has done with its family plan.
Willingness to pay for various features of Spotify.
Using this willingness-to-pay data, it seems that Spotify could certainly increase the overall subscription price by $3 without any problem.
By surveying users on their willingness to pay, Spotify found that it could, for example, significantly increase its prices for its family plan.
For Amazon, we have found bases based on different customer segments. In surveying 11,089 bonus customers, we found that age and annual salary were two of the main factors impacting willingness to pay.
Willingness to pay for different age groups of Amazon Prime customers.
In 2014, the price of amazon Prime was $7.99 per month. This price has evolved to $9.99 and then to $12.99. This increases the annual price from $95.88 to $119.88 and then to $155.88. This first jump put Amazon in an excellent position to capitalize on each age group as shown in the chart.
The second increase has actually placed them above average by age. It is nevertheless an excellent strategic choice combined with the study of the willingness to pay based on the annual income of its audience.
Amazon is about right on target with the $100,000 to $150,000 annual salary range. This indicates they are going more upscale with their positioning to capitalize on the increased willingness to pay. One study is not enough, they need to diversify to understand the overall issues.
Klack: collaborative surveys to determine the willingness to pay of your current and future customers.
Whether for products or services, Klack gives you the ability to create specialized surveys on your customers' willingness to pay. By surveying your market, you'll know who is most likely to buy your product or service and what price to set to maximize your sales and revenue. Just as Amazon or Spotify have done by surveying their customers, do the same to avoid getting it wrong and get maximum value from your product or service. Making decisions based on your customers & audience will ensure that you meet their expectations and keep them coming back.
Knowing what your customers are willing to pay for your product is necessary to build an effective and competitive pricing strategy. Without this information, you are just guessing.
With Klack's help, you can find and validate your own WTP. Contact a free price audit today!