What Is The WTP Rule For Focus?
Any subscription product or service is built on recurring growth, retention, and revenue. There are various factors that you should consider when designing your pricing strategy. The best pricing strategy shouldn’t incur losses to your firm or exploit the customers. Striking a balance between fulfilling your customers’ needs and maximizing your profits is important. Overcharging your customers can reduce traffic in your business because your potential buyers will consider your competitors. On the other hand, underpricing your products may cause losses. Before coming up with a pricing strategy, evaluate your customers’ willingness to pay (WTP).
WHAT IS THE WTP RULE FOR FOCUS
WTP is the abbreviation for willingness to pay. Basically, WTP is the optimum price that a customer or client is willing and able to pay for a service or product. The main aim of this rule is to develop better clarity, decision-making skills, and focus. You can represent your customers’ willingness to pay using a price range or a dollar figure. Based on economics, this rule shows that your target customers will only pay a certain amount of money, regardless of the quality or other factors that might affect pricing. Willingness to pay will differ from one individual to another. The main factor that affects WTP is the customer population and can be classified into two aspects: intrinsic and extrinsic differences:
– Intrinsic Differences
These are factors that you won’t know unless you ask your potential customers. At some point, intrinsic differences are termed unobserved differences. For instance, you can’t identify your customer’s level of passion, risk tolerance, or desire to fit in with others. These factors can influence your customer’s willingness to pay.
– Extrinsic Differences
These incorporate observable customer characteristics. You won’t ask your customers about their extrinsic differences. Some of the top extrinsic differences that can affect your customers’ willingness to pay to include education, level of income, age, gender, and geographical location.
OTHER FACTORS THAT AFFECT WTP
1. Availability of Close Substitutes
Willingness to pay can be influenced by the availability of close substitutes. When you’re coming up with a comprehensive pricing strategy, consider the price and availability of alternatives. You can evaluate your customers’ willingness to pay based on close substitutes.
2. Product Scarcity
When products are scarce in the market, sellers tend to overprice them because buyers lack options. Evaluate product scarcity before you design your pricing strategy. You should be customer-centric; therefore, don’t take advantage of exploiting your customers because a commodity is scarce in supply.
3. Reference Prices
Before coming up with a desired pricing strategy, analyze reference prices. You should reference prices in similar commodities to ascertain the price of current products.
4. Brand Image
Customers will research a company before purchasing its products. The main objective of doing this research is to ascertain whether the price suits its brand image. If your company has an established brand image, it’s easier for clients and customers to expect a certain price. Based on research, brand recall value is an essential attribute in a business.
5. Seasonality
According to some studies, willingness to pay depends on the business season. This aspect may be influenced by the current trends in the market. Most customers will be willing to pay more for the latest trends.
6. Customer Demographics
Willingness to pay can be affected by your geographical location. For instance, the WTP of a person living in an urban area will differ from a person living in a rural area. This means that you may be willing to pay more than someone for the same product. In addition, tastes and preferences are other aspects that can influence a customer’s willingness to pay.
HOW TO DETERMINE WTP?
Calculating the willingness to pay will help a firm set a price that’ll satisfy customer wants and maximize profits. Below are the key methods of determining customers’ willingness to pay:
a. Market (Competitor) Research
If you’re operating a monopoly, you have an opportunity to spike your prices. On the other side, if you’re in a perfectly competitive market, you need to price your products at a near equal value to your competitors. Market research will help you estimate the best price for your product.
b. Customer Research
Finding more information about your target audience is an important aspect that’ll help you set the right price for your service or product. Determining the tastes and preferences of your customers in order to discover the best price point.
c. Surveys and Focus Groups
One of the best ways of knowing your customers’ willingness to pay is to ask them. Based on research, surveys are more cost-effective compared to focus groups. Therefore, choose a way that suits your budget and business needs. Focus groups will help you obtain qualitative data, whereas surveys will help you obtain quantitative data. Design your surveys in a way that will please respondents to reduce the margin of error. Erroneous data can affect your pricing strategy and other crucial business decisions.
d. Revealed Preferences and Experiments
You can use the past data for a customer’s willingness to pay. Revealed preferences focus on the insights rather than what clients say. This approach tends to be complex because you’re prone to data misinterpretation.
e. Conjoint Analysis and Auctions
Conjoint analysis can help you identify your target customer’s tastes and preferences on products and pricing. This information will help you predict product prices, market shares, product features, and product adoptions. In addition, there are several types of auctions that can measure a customer’s willingness to pay: sealed first-price auction, open outcry auction, and sealed second-price auction.
IMPORTANCE OF WTP RULE OF FOCUS
You can’t attract targeted leads if your prices are too high. Great pricing strategies will play a great role in customer retention. If your price tag aligns with your customers’ WTP amount, you’ll experience increased traffic. Determining WTP will help you segment customers better based on purpose, income, location, frequency, demographics, and retention. In addition, the WTP rule of focus will help you attain a competitive advantage, thus maximizing profit and satisfying your customers.
Conclusion
There are various ways that’ll help you influence customers’ willingness to pay. Some of these factors include social proof, influencer marketing, and brand awareness.