What is Willingness to pay and its role in business or marketing?

Willingness to pay denotes the maximum price that a customer will buy a product. Here the buyer’s willingness to pay for the product and the seller’s willingness to sell will be accepted by both. The consumer willingness to pay is basically a context-sensitive construct.

Willingness to pay by the consumer depends on the discretion of the consumer and the situation. For example, the consumer’s willingness to pay for a water bottle at the airport will be more than at any local store.

Factors that affect Consumer’s willingness to pay

If willingness to pay is understood by the company before fixing up the prices of the product, strategies can be developed to fix up the prices of the product. Using data from the past and value-based pricing, salespeople will be able to understand the ways the consumer will value a product. The following factors will affect consumer’s willingness to pay for a product:

• Consumers will be willing to pay more when they believe that when the price is high, the quality also becomes high.
• When there are exceptional attributes in the product, the consumers will be willing to pay for the product.
• When the consumer’s expenditure is more, they are less willing to pay.
• The characteristics of the consumer like race, age, gender, marital status, education, income, lifestyle, and interests will have the impact on willing to pay.
• Due to the enormous increase in the fashion world and its demand, the consumer’s willingness to pay for those products is increased.
• Environmental factors will have an influence the willingness to pay. For example, in case of recession, the consumer’s willingness to pay will be low in comparison to the period when the economy is successful.
• When the consumer feels that the price is fair when compared to other places, they will tend to buy.
• A brand which has inspired a positive emotion will provide a higher price as the consumer’s will purchase with emotions.

It is, in fact, critical analysis to find the consumer’s willingness to pay. In some cases, researchers will follow the direct approach where they ask the consumers directly to state their willingness to pay through open-ended questions. Sometimes they follow an indirect approach where there will be an analysis and the willingness to pay is calculated based on the choice of the consumer.

Demand is factored to determine the best price that will satisfy the producer and the consumer. Our willingness to pay for a product will vary. For example, consider the situation when you have to travel to a particular location for business need. For the travel, our willingness to pay towards the taxi charges will be Rs. 500. But when the company is ready to pay the tax bills, our willingness to pay will be increased.

How to measure willingness to pay?

It is very difficult to understand how much a customer is willing to pay for a particular product to formulate competitive strategies, to develop new products and to conduct value audits. Judging the consumer’s willingness to pay is a very important factor for targeted promotions, pricing etc. The most important variable in marketing is pricing. It focuses on margins, positioning the product in the marketplace and sales volume. The consumer’s perception of the price must be accessed correctly and it is very important.

As said byAssociate Professor of Management Sciences, Marketing and Consumer Behavior, at the University of Western Brittany in France, in his article Recherche et Applications en Marketing (French Edition), SAGE Publications,titled – ‘Definition, Measurement and Determinants of the Consumer’s Willingness to Pay: a Critical Synthesis and Directions for Further Research’ – Marine Le Gall-Ely,:

“Ability to measure WTP enables calculation of the demand curve according to price and to set a price that offers the best possible margin. When prices can be customized, knowing the WTP could enable optimization of both sales volumes and margins.Understanding the factors that influence WTP allows it to be raised and offers the opportunity of increasing sales volumes for a given price or, when possible, to customize prices.

Role of willingness to pay in business

For the business to arrive at a pricing strategy, it is very important to have knowledge of consumer’s willingness to pay.

Whenever a consumer goes to buy a product, they look at two main parameters – the price of the product or service and attribute of the product or service. The consumer will look at ideal solution taking into consideration both.

Considering the attributes of the product or service, the product features will be looked into by the consumer. Consider that the consumer goes to an electronic shop to buy the mobile phone. While deciding he might look at two different mobile phones and then compare their specifications and prices. If the consumer wants to have more memory on the mobile phone, then the consumer’s willingness to pay will be more. As said earlier, the consumer will look for an ideal solution by considering the attributes and price. The consumer would have fixed his mind based on the attribute of the product, without having a look at the price tag. Probably the consumer might choose the mobile based on his choice of the memory that is required. This price is the consumer’s willingness to pay.

Maximum willingness to pay will denote the highest price that can be on the price tag which the consumer will find it expensive and then change the mind of purchase. Minimum willingness to pay will denote the least price on the price tag when the consumer finds on the product and then feel doubt regarding the quality of the product.

There are various factors that can influence the consumer’s willingness to pay. Few of them are:

Need and value of the buyer – This is referred to as own-value. This denotes the value that the consumer will derive from the product or service.  This is also derived from the consumer’s budget and the usefulness of the product to the consumer.

Market value – This denotes the value of the product in the market. The way the consumer rates the product and the feasibility of the price.

Value uncertainty – Some situation arises when there is uncertainty in making a purchase. It might range from buying a cloth, car or a holiday package. This kind of uncertainty will impact the willingness to pay.

Conclusion

Willingness to pay is beyond the financial capacity of a person and has many factors. It is the maximum price that a consumer can pay. It will enable setting price to maximum turnover, market value, and profits.