What is the willingness to pay?

Willingness To Pay (WTP) is a concept from pricing research studies describing the maximum price the customer is ready to pay for the product.

In short, you could say that WTP is the reflection of how valuable users find the product in a particular context.

Willingness to pay vs. willingness to accept

Willingness to pay and willingness to accept are two closely related concepts.

As mentioned, willingness to pay tells you how much your users are ready to pay for your product. That’s the maximum you can get out of them.

Willingness to accept (WTA), on the other hand, is the minimum price that the seller is happy to accept for the product.

If the WTP and WTA are the same, that’s a win-win situation!

However, more often than not, there are discrepancies between the two. That’s because sellers tend to perceive their products as more valuable than buyers. We call this the endowment effect.

Why is it important to measure customer’s willingness to pay?

As a product or marketing manager, you’re probably getting an idea of how important willingness to pay is for SaaS businesses.

Here are 3 main reasons why you should care about it.

WTP Influences the pricing strategy

Customers’ willingness to pay affects how much a company can charge for a product.

This one is straightforward. If the WTP for your SaaS tool is $25, that’s all you are getting. Unless customers’ perception of the product value changes.

That’s not all though.

WTA data for each feature can help you fine-tune the individual pricing plans. For example, if a feature is particularly valuable to users, you may include it in one of the premium plans to maximize its revenue-generation power.

WTP Guides product development

Willingness to pay should also guide your product development.

For starters, teams can use it to determine the feasibility of the product. If the estimated level of effort needed to build the product exceeds what you can charge customers, it will fail.

You can also use it to prioritize certain features over others. If one of them is likely to increase the WTP more than the other, that’s what you build first.

WTP Predicts future customer churn

WTP can also help you forecast future customer churn – and possibly prevent it.

If you can see the perceived customer value decrease, they may eventually cancel their subscription.

Tracking the trend can help you identify drops and follow up with more qualitative research to identify ways to reverse the process.

What are the factors that influence WTP?

The main factors that can affect WTP include:

• State of the economy – the financial performance of your customers affects their spending capacity and consequently – willingness to pay.
• Quality – the better the product or feature, the higher a consumer’s willingness to pay.
• Competitors – if there are lots of competitors offering a similar product at lower prices, the WTP drops.
• Demand – the WTP curve closely correlates with the demand curve – if the product is scarce, customers are ready to pay a higher price. As SaaS products are easily scalable, this isn’t always relevant though.
• Brand image – the majority of SaaS users will only commit to established products from reputable brands with a proven track record of delivering. quality solutions. If you’re in this position, you can charge more.
• Customer demographics – different user segments may place value on different product aspects and this will affect their WTP.
• Seasonality – WTA for SaaS products can fluctuate around the year.

How to calculate willingness to pay?

We’ve already given you a few hints on how to asses users’ willingness to pay when discussing the factors that affect it. Let’s explore it in more depth.

Market research

Market research allows you to understand your target customers and the competitive landscape.

Thanks to such insights, you will be able to understand what products are already available and how much their users are willing to pay.

What techniques can you use for market research?

Start with existing industry reports to develop a general understanding. Follow up with detailed competitor research. Look at their pricing plans as well as business performance.

Interviews and focus groups

Interviews and focus groups with potential and existing customers are an effective way to assess their price sensitivity and identify the factors that influence it.

When preparing your interviews, decide on the methodology you will use.

What options have you got?

The Gabor-Granger Pricing Method is a simple one. It uses one Yes/No question:

Would buy product X if it cost Y?

The Van Westendorp’s Price Sensitivity Meter is a more nuanced approach as it allows you to determine a range of prices for your product.

The questions you ask are:

1. At what price would you consider this SaaS product to be so expensive that you would not consider buying it?
2. At what price would you consider this SaaS product to be so inexpensive that you’d doubt its quality?
3. At what price would you be indifferent to buying or not buying this SaaS product?
4. At what price would you say this SaaS product is a great deal?

Before you get started, make sure you have a plan too. Who are you going to interview and how will you be conducting the interviews are some of the essential things to consider.

Customer surveys

If you already have a product in place, you can collect the WTA data via in-app surveys.

Their advantage is that they’re easy to create, and you can target specific user segments. And they’re way less time-consuming than interviews or focus groups, which makes them perfect for large-scale research.

Apart from simple quantitative questions, you can also use in-app surveys to collect qualitative data, just like in interviews. Simply follow up the quantitative questions with open-ended ones to give users a chance to justify their answers.

Naturally, you’re not limited to in-app surveys. You can deliver them by email or leverage customer research platforms like Qualaroo.

Conjoint analysis

Conjoint analysis is a powerful pricing research tool because it emulates the decision-making process that customers go through when they buy products.

How does it work?

Basically, you break down the product features and prices into several different packages. Next, you present them to users and ask them to choose one based on their preferences and the importance of different features.

Experimentation

Another effective way to test your user’s exact willingness to pay is through experimentation.

Check out this fake door test by Buffer!

First, the team used it to test the interest in the feature. They did it by triggering a modal introducing the planned feature as if it already existed and including a Plans and Pricing button.

When users clicked on it, they had to choose the most suitable plan. This was to test how much they were willing to pay. Only after choosing one, were they told that the feature was still under development. Sneaky!

What is an example of willingness to pay?

Imagine you’re a product manager of a new cloud-based accounting system. You have identified a target market of 2,000 small businesses and believe that your product meets their needs better than those of your competitors.

To understand the maximum price your customers are willing to pay, you conduct a customer research survey.

The survey results reveal that customers are willing to pay $150 per month. If the software comes with an AI-powered analytics feature, they would be content to pay $250 per month.

Let’s suppose that if you charge $150 for the basic product, all 2,000 businesses are likely to buy the product. This would result in the same monthly recurring revenue of $300,000 ($150 x 2000 businesses).

You’ve also discovered that 1200 of the respondents agreed to purchase the AI-powered product for $250 per month. This would generate monthly revenue of $250 x 1200 businesses = $300,000.

This means that if you developed the AI feature and offered it in a higher plan, you would generate an additional $120,000 ($100 x 1200), and the total recurring revenue would increase to $380,000.

Is it worth it?

This boils down to how much it costs to build and maintain it. Bear in mind that WTP isn’t a constant, so as the perceived value of AI-powered features grows, more users might be willing to upgrade to the higher plan. It can also give you a competitive advantage.

How to increase willingness to pay?

There are a number of ways for product and marketing teams to boost the WTP of potential customers.

Enhance product quality and value to boost pay willingness

Improving the perceived product value is the obvious way to increase WTP.

One way to do it is by improving its quality, for example, by fixing bugs and making it more reliable. The other option is to develop new features.

How can you identify opportunities to add value to the product?

Start by collecting user feedback and feature requests. Also, analyze your competitor’s offerings and look for better ways to solve the same problems.

Offer a premium plan to influence customer preferences

Start by offering a tiered pricing structure with a free plan to attract lots of users and give them a chance to experience the product value for free.

Next, give them a taste of the premium features, for example, through a free (reverse) trial. This may be all it takes to increase their WTA and make them upgrade to a higher plan.

Communicate the value proposition accurately

When preparing the product or feature launch, make sure the marketing collateral communicates the value proposition clearly and consistently.

This involves your website copy as well as the microcopy inside the product.

If your users don’t know what problem the product solves or how it differs from competitors, they won’t be willing to part with the hard-earned cash.

If you have no copywriter around, just use an AI writing assistant to improve your existing copy.

Educate customers about your product’s functionality

If your customers can use the product efficiently and effectively, they are able to realize its full value, and so their willingness to pay grows. That’s why it’s important to invest in customer education.

This could be in the form of user onboarding – both primary and secondary so that they can discover the relevant features as well as the resource center materials.

This is not limited to in-app instruction. You can host webinars, start a skills academy with free courses, and publish blog posts with practical advice on how to get the best value out of the product.

Provide integrations to increase customer willingness

Integrations expand product functionality and consequently add value to the product.

What’s more, they make your product easier to embed into users’ workflows. This translates into higher efficiency and, consequently, the potential to generate more revenue.

So in your customer research and market research, focus also on other products that your target audience uses and prioritize the integrations that will contribute to customer success the most.

Metrics to track alongside consumers’ willingness to pay

To get a more complete picture of the user’s willingness to pay and fine-tune your pricing strategy, it’s important to track other metrics as well.

Here are a few examples. For the insights to be of any value, it’s vital to track these for users at different price points.

• Customer satisfaction metrics (like CSAT or NPS) – they will show you how well the product meets the expectations of users on different plans.
• Churn rate – users leaving the product en masse could be an indication that you’re charging too much for a particular plan.
• Customer Lifetime Value (LTV) – the overall value of the business that users bring. If you look at the figures for users on different pricing plans, you can identify the most profitable ones.
• Customer Acquisition Cost (CAC) – this metric can help find which customer segment is the most cost-effective to acquire. Very high CAC can erase all the benefits of a higher willingness to pay.

Conclusion

Measuring customers’ willingness to pay is essential to make informed product development and pricing strategies. That’s because your product will fail if your users are not willing to pay, no matter how good it is.

If you’d like to see how Userpilot can help you track and increase WTP, book the demo!