What is Willingness to Pay?
Pricing is usually a gray area in any business. Entrepreneurs seem skeptical about innovating in their pricing strategies — when they actually have developed one from the get-go.
I believe this only happens because most people use old methods to think about pricing in the digital market. Even if you do not have a digital product, the whole market is now undeniably digital. So let’s talk about how the 2020-on pricing strategy should look like.
The first thing is to forget about the cost. There’s a misconception that price and cost must be connected in any given product, which does not apply anymore. Analyzing your operational cost is mandatory for the financial health of your business, but there’s nothing to do with your price. Nothing at all.
What drives your products’ prices are your customers’ willingness to pay (WTP). Which is how much they are willing to pay to solve a problem they currently have. A problem that your product or service is claiming to solve.
Customers don’t pay for your product. They pay for a solution to a problem. That’s why the cost of your product has nothing to do with your price.
So, customers don’t care about your costs. And now you’re wondering: how do I find out my customers’ willingness to pay then? There are two simple steps you can take to find their WTP:
Step 1# Talk to your customers
In a recent post, Profitwell shows we are not talking as much as we should to our customers. 70% of companies talk to less than 10 customers per month.
So simply put: talk to your customers. Call them, invite them to lunch, send out a survey. Listen to them and their problems, because that’s the only way you’re going to understand their real problems and eventually, how much would they pay to solve them. And if you have trouble around that area, here’s something might help:
Rob Fitzpatrick describes very practical ways to talk to your customers. It is so rare for a book to show that many rich examples in a specific and subjective theme such as customer interaction. This conversation’s goal is to understand your customer’s willingness to pay for a specific problem. So it’s definitely less talking and way more listening.
Step 2 # Define value metrics based on WTP
After you have talked to your customers and drafted their problem, you must go back to your pricing strategy and review it. And this is the moment to think about your product’s value metrics, or how much your product is solving your customer’s problem.
Value metrics are what you charge for on your product — per user, per a specific feature, video, etc. And they must be connected with where your customer perceives value from your product. Otherwise, there’s little chance your pricing strategy succeeds. So ask yourself: what are the value metrics of your product? How much did your customers’ opinions influence that decision-making process?
If you want to learn more about WTP, you can take a look at my video (Portuguese with English subtitles). Or you can leave a comment or a question here, I’d love to hear you out!
Larissa Sielichoff is a consultant and mentor in Pricing Strategy, holds an M.SC degree in Business and Innovation, and developed a pricing methodology focused on digital solutions based on her dissertation — Why Pricing Matters.
