Core Concepts: Willingness to Pay
By Gregory Ronczewski, Director of Product Design at Ibbaka. See his skill profile.
Definition of Willingness to Pay (WTP)
Wikipedia
In behavioural economics, Willingness to Pay (WPT) is the maximum price at or below which a consumer will definitely buy one unit of a product. This corresponds to the standard economic view of a consumer reservation price. Some researchers, however, conceptualize WTP as a range.
Harvard Business School
Willingness to pay, sometimes abbreviated as WTP, is the maximum price a customer is willing to pay for a product or service. It's typically represented by a dollar figure or, in some cases, a price range. While potential customers are likely willing to pay less than this threshold, it's important to understand that, in most cases, they won't pay a higher price.
The Ibbaka View on Willingness to Pay
Willingness to pay is not a given that can be discovered. It is something that is shaped , first the perception of value and then by the experience of value. As such, it is under partial control of the vendor, though value communication, value delivery and value documentation.
Value has three aspects, economic, emotional and community. Each of these shapes willingness to pay in its own way.
Economic value establishes a range that an offer needs to be priced within. Very few buyers will pay more than the value they are receiving (and if you are asking them to do so you are not developing a sustainable business model).
Emotional value is what motivates buying and has a big influence on willingness to pay. If emotional value is low the buyer will be unmotivated and it will be hard to get to a purchase decision.
Community value is the value to people not directly involved in the purchase. It is based on the economic theory of externalities. Community value is important to many government organizations and non-profits and is growing in importance generally.
Do not base pricing decisions on willingness to pay. It is an artifact of other work on value and on connecting price to value. Trying to optimize WTP directly or basing prices on WTP leads to poor pricing decisions and sub-optimal outcomes.
Pricing experts who claim to optimize for WTP are leading their customers astray.
Lean more about How to shape willingness to pay
More reading for you
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Willingness to Pay (WTP) (this post)
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Connecting Value and Pricing Models
Cross Price Elasticity
Customer Value Journey
Customer Value Management
Economic Value Driver
Interactions of Cross Price Elasticity and Price Elasticity of Demand
Package Design
Pocket Price Waterfall
Price Elasticity of Demand
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Pricing Model
Value Based Market Segmentation
Value Ratio
Value to Customer (V2C)