Willingness to pay: How to research and improve it

Willingness to pay: What is WTP and how to increase it

One of the most powerful yet overlooked growth levers in SaaS is pricing strategy. Get it right and your revenue can soar. To do so, you need a handle on your target market's willingness to pay.

What is willingness to pay?

Willingness to pay (WTP) is the maximum price that a customer is willing to pay for a product or service. WTP varies depending on the context, different demographics, the specific customer in question, and can fluctuate over time. As a result, willingness to pay is usually represented as a price range, rather than a single dollar figure.

By researching willingness to pay, you can optimize your pricing and packaging to see greater conversions in different regions.

3 reasons why willingness to pay is important

So, we've given the dictionary meaning of willingness to pay: it means exactly what it says. But what does willingness to pay really mean? In other words, how does this simple concept impact your business? In what ways can you use this number to form actionable insights regarding your business? Let's now take a look at how customers' willingness to pay has an actual impact on your business.

1. Willingness to pay reflects market demand

We talked about supply and demand curves earlier. Generally speaking, the more demand there is for something, the more people will be willing to pay for it. This means that tracking the willingness to pay for your product over time also serves as a sort of proxy for tracking the market demand for that product. Company-wide, this can be very helpful because it allows you to see which products, or features of a product, are worth pursuing and which may not be good investments.

2. Willingness to pay drives pricing strategy

Willingness to pay will help you decide the appropriate pricing strategy. But it goes beyond that, particularly for SaaS companies. For example, if you have tiered pricing, which features go in which tier? It might seem obvious, but it's not as simple as placing the features with the lowest willingness to pay in the lowest tier, and the ones with the highest willingness to pay in the highest. There's more to how you decide what and how you charge for new products and certain features. And without the data to make informed decisions, many SaaS companies end up giving away features they should be charging for, or tying their monetization strategy to features that people aren't as likely to break out the wallet for.

3. Willingness to pay drives product development

As you've probably already considered, understanding what features and products people are willing to pay for doesn't just influence where you put a feature into your pricing tier. It also helps you to understand which products and features you should be focusing your time on. As a reflection of market demand, willingness to pay tells you which direction your product development should go in, helping to ensure that you are always driving your product towards growth for your business.

6 factors that influence willingness to pay (WTP)

A number of factors affect consumers’ willingness to pay. Everything from the current market environment to a customer's personal preferences has a direct impact. The WTP ranges vary significantly depending on the size of the company that is considering a purchase.

1. The state of the economy

When the economy is doing well, WTP is likely to increase. A general recession or issues specific to your industry will cause WTP to decrease. Watch for indicators of these general market shifts when thinking about your own subscription pricing.

2. How trendy/in-season a product is

For products and services with a high amount of seasonality, WTP will fluctuate with the seasons. Fluctuations like this are generally consistent and easy to track as long as you know how the market has behaved in the past. Trendiness, however, will be much more difficult to monitor.

3. Consumer’s personal price points

Every customer has a different personal history that informs how they think about price. While it's impossible to account for each and every customer's possible background, you can examine how different aspects of your industry impact the customer directly.

4. Circumstantial needs in different consumers

Consumers have personal feelings about price points, and their individual circumstances directly impact WTP.

5. How scarce or rare a product is

The less something is available, the more valuable it will become. If your customers perceive the product or service that you're selling as rare, it will raise their willingness to pay.

6. The quality of a brand or product

Consumer perception of quality has a direct impact on WTP in much the same way as rareness. The higher the quality, the higher the willingness to pay.

How to calculate WTP

A willingness to pay formula doesn’t exist, as one of the big issues with any problem of economics is that humans aren't entirely rational. However, three factors to getting an accurate customer's WTP range are described below.

1. Market research

Market research surveys the market that exists for a product, and the competitive landscape that exists around it.

2. Customer research

Your product’s features need to line up with the features that those consumers value the most.

3. Direct/indirect surveys

The use of surveys, direct or indirect, is a great way to gather information about what customers want.

How to increase willingness to pay

Willingness to pay isn't static, and it is tied to your specific product and how it fits into the market. Here are three approaches:

1. Perfect your value proposition

Take a look at your messaging. If you can’t clearly and simply articulate your value proposition and what sets you apart from your competitors, you cannot expect your target audience to pick up on or understand.

2. Raise brand awareness

Building brand awareness comes down to a powerful marketing strategy.

3. Get involved with influencer marketing

Partnering with influencers in your field drives awareness but also links their credibility to your name.

Willingness to pay examples

Here are three examples showing how each company could use WTP to improve their pricing strategy.

Spotify

Spotify's standard plan is $9.99 a month, which is right in line with overall WTP.

Amazon Prime

For Amazon, we found a lot of interesting data based on different customer segments.

Shopify

Shopify is one of the companies that did the best job of pricing for their customer's WTP.

Other metrics to consider

Your customers’ willingness to pay is a metric that reveals a lot about the health of your business, but it doesn’t give you the whole picture.