Understanding Willingness to Pay for a Product

Determining willingness to pay or in Indonesian which means willingness to pay to consumers is one of the aspects needed in managing a business. By knowing the customer's willingness to pay, brands can set prices at a certain level that allows the company to maximize profits and customer satisfaction.

If you are a professional responsible for determining pricing strategies, it is important to understand how much consumers are willing to pay for the product. A willingness-to-pay concept and strategy that you can use to estimate these important metrics.

What is willingness to pay?

Willingness to pay or willingness to pay each customer is different. This is due to differences in the consumer population which are usually classified as extrinsic or intrinsic value.

Extrinsic value is an observable difference so that usually the factors of the difference can be known without asking the consumer. For example, age, gender, income, education, and place of residence of consumers.

Meanwhile, intrinsic value is a characteristic of a person that you will not know without asking directly, such as consumer tolerance, the level of consumer desire to conform to others, and the level of consumer desire on a particular subject. Both can affect consumers' willingness to pay for a product.

Other factors that affect willingness to pay

It is important to remember that consumers' willingness to pay is not static, because apart from extrinsic and intrinsic differences, there are many other factors that can cause consumers' willingness to pay to go up or down. For example, currently the brand name to the form of packaging are supporting factors that can attract consumers to buy your product.

Another factor is need. When a customer has an urgent need that can only be addressed by a particular product, it is more likely that consumers will pay a higher price than usual.

Similarly, supply shortages can make consumers more willing to pay higher prices than before. For example, scarce oil makes the price of oil in the market soar. Families and food business owners will spend more than usual.

Conversely, a customer's willingness to pay may decrease due to the emergence of a new competitor with a stronger branding or the perception that your product is out of date. For example, services engaged in conventional shipping may be abandoned. Compared to modern freight forwarding services and using marketing through social media.

How to Determine Willingness to Pay from Consumers

To find out how to determine a consumer's willingness to pay, you can use several approaches. Ways to find out the ability to pay from consumers include the following.

1. Surveys and Focus Groups

One of the most appropriate ways to determine willingness to pay is to ask consumers. Surveys and focus groups are good ways to find out. Surveys will typically produce large amounts of data, while focus groups will produce more varied qualitative information.

However, there are drawbacks to this method, as they are not designed to encourage respondents to answer honestly. In addition, if you use a bad sample of consumers, the resulting data will be incorrect.

2. Combined Analysis

This method is a special type of survey, in which respondents are asked to rate different features. The results are then used to assign a numerical value to each feature, which is later called the part worth.

These values ​​can be used to predict how consumers will react to certain products, and help brands determine willingness to pay.

3. Auction

There are several types of auctions that can help you to see if you are willing to pay. Some of the most common include:

• Open auction (English auction)

This is the most common auction and perhaps the most widely known. In this type of auction, a group of buyers will bid that they feel they can afford. The consumer with the highest paying desire wins the auction, and gets the product.

• Second price auction closed (Vickrey auction)

In this type of auction, a group of potential buyers will submit a closed bid. The bidder who submitted the highest bid will win the auction. However, the bidder must pay the second highest bid, so other bidders will be motivated to bid.

• The first sealed price auction

Unlike the vickrey auction, the highest bidder will pay the price they bid. In this type, bidders often bid below willingness, so they can get more profit.

4. View consumer preferences and experiments

Consumer purchase history can determine willingness to pay. However, the drawback of this method is the possibility of missing variables, so that the interpretation of the data will be confused or wrong.

The solution that can be done is to run experiments. For example, without looking at the willingness of consumers, determine the price of the product. After that look at the level of sales. By using experiments, like that you can avoid the problem.

While trial and error can be a way to determine a consumer's willingness to pay, taking training is a quicker way to hone this skill. Pricing must be designed through the right strategy for the sustainability of the product and the company.

Therefore, it is important to always pay attention to alternative pricing strategies as can be learned through the Marketing Pricing Strategy program. Company executives will always be able to make the best decisions based on aspects of market competition, consumers, and cost considerations to get the best pricing strategy.