What is a customer's willingness to pay?
The customer’s willingness to pay (WTP) is the maximum that they would pay for a particular product. It can be thought of as the total benefit that they perceive to gain from the product or the level at which they are indifferent about whether they should buy a particular good or not.
The connection between willingness to pay and the price of a good
While a customer’s willingness to pay is the maximum they would pay, the price of the good is the amount an item costs. Unless a customer’s willingness to pay exceeds the costs, they won’t buy the item – they don’t believe that the benefit that they will derive from the item will exceed the cost of the good.
Approaches for increasing customers willingness to pay
Product features and other product improvements
One of the first ways to consider increasing customers’ willingness to pay is via improvements to the actual product. Be it improvements in the features, better material, or design enhancements, if you are able to improve the underlying quality of the item, customers may be willing to pay a higher price.
Another key approach to increase customers’ willingness to pay is through advertisements that make the product seem more desirable. Celebrity endorsements and brand awareness can push up the desirability of products, increasing the amount that customers are willing to pay for the item.
Increasing the value through network effects
Another connected approach to increase customers’ willingness to pay is through network effects and word-of-mouth promotions. The more existing customers promote your product, or the greater the benefit that comes from using your item because of other customers that also use it, the greater a particular customer may be willing to pay.
Benefits of increasing customers willingness to pay
The key benefit of increasing a customer’s willingness to pay is that it can allow you to charge a higher price. If you can convince customers of the value of the product (i.e., by actually increasing that value, or through marketing increasing the perceived value), there is a greater opportunity available for you to capture a higher price.
Final thoughts: Ensuring that the additional price that you are able to charge exceeds the additional costs
It is important to recognize that increasing a customer’s willingness to pay likely involves some degree of additional costs. Be it a greater advertising budget or the cost of developing and manufacturing a better product, such approaches involve additional costs for the firm. For the approach to make financial sense, it is important that the increase in price that you are able to charge for the product (or increase in customer volumes if you are now are able to attract new customers), exceed the additional costs involved in adding the additional features.