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Value-Based Pricing: Finding out customers’ willingness to pay

We know that finding the best pricing strategy can be challenging. Since all of them have ups and downs, it’s up to you to decide which one fits your business. That’s why we do our best to help you understand the advantages and disadvantages of various pricing strategies.

Value-based pricing is a well-known strategy you can add to your marketing mix. Many B2B companies pursue this strategy, but it can also work for online retailers.

What is value-based pricing

Value-based pricing is a strategy where a business sets the price of a product based on how the target audience values it.

In other words, it is based on the target audience’s willingness to pay (WTP) for a product.

It has a significant effect on consumers’ focus when they are shopping, shifting it from price to value. Instead of selling price, firms that pursue this strategy sell value.

We know that you also have to compete on price to preserve your competitive strength, but you can implement this strategy on certain products that are distinguished with their value instead of price.

What’s the logic behind it

As an online retailer, you know by heart that pricing strategy can be game-changer. But no matter which strategy you pursue, the main objective remains the same, finding the optimal price/demand ratio. What is it?

It’s the price and demand combination that yields the highest profit. Suppose you’re selling sneakers in a local market. Per unit cost is $20.

In summer you sell it for $50, and 50 people buy it. In winter you lower the price to $40, and 80 people buy it. Even though the winter price is cheaper, you make $100 more profit with it.

What if you sold it for $45, and 70 people want it? You’d make even more profit.

As you can see, there are numerous probabilities, and marketers’ job is to determine the most profitable option.

Now, let’s turn back to the logic behind value-based pricing.

Instead of testing countless price points, this strategy allows marketers to ask the target audience their willingness to pay for a particular product.

Of course, in a real-life case, it’s not possible to ask every customer one by one, but surveys give marketers a clue of the average WTP.

Let’s learn how you can conduct one.

How to conduct a WTP research

Step one: Segment the market

As a first step, you should identify your buyer personas. A buyer persona is a profile that mirrors the ideal customer of a product. Usually, there are multiple buyer personas of a single product.

Think of a person that earns $5000 monthly income and another one that earns $7000.

Naturally, they have different levels of purchasing power. That’s one reason why businesses segment the target audience. The other factors they count in include:

  • Location: Region, Country, State, City, sometimes even neighborhood
  • Demography: Age, Income, Employment Status, Education, etc.
  • Consumption Behavior: Regularity, Volume, Purpose

You can modify/expand the segmentation based on your objectives/needs.

source: https://blog.alexa.com/10-buyer-persona-examples-help-create/

Once you’ve determined all of them, you need to collect information on each. Now it’s time to survey your buyer personas.

Step two: Survey the buyer personas

Suppose you identified 8 eight different buyer personas. Now it’s time to form sample groups for each of them. For the sake of simplicity, let’s name the first one ‘Buyer Persona (BP) 1. Say you have the contact information of 1000 individuals from BP1, and you’ve decided to survey 100 people from all BPs.

To achieve the highest accuracy, you should randomly select the individuals you’re going to survey. You should do so to avoid biased results. After you randomly select a sample group of customers, you ask them questions that could give you their motivations to buy the product, as well as WTP.

Sample questions

  • Which price below is the maximum price you would be willing to pay for this product?
  • Which price you think should be the minimum amount one should pay to purchase this product?
  • What would you think would be a fair price for this product?
  • Please rank order the product features below according to the value you see in each.
  • Which product feature/features you think should be improved?

After you’ve collected all the answers you were looking for, it’s time to analyze the results.

Step three: Analyze the data

The data you obtained from the survey will reveal patterns and trends of each BP. The next step is to analyze the data to find out:

  • what is the WTP range (the price range between the maximum amount and minimum amount they are willing to pay) of each BP group
  • the commonalities in ingroup and intergroup purchase behavior
  • which BP is the highest profit yielding group
  • which product features contribute most to the WTP
  • what are the common pain points

Say, you found out that most of your target audience would see greater value in the product if it had a certain extra feature. If that feature isn’t too costly, you can add it to your product, boost your sales and dramatically increase your revenue.

The final step is testing the prices within the WTP ranges you’ve obtained from your analysis.

Step four: Test price points

As mentioned above, what customers say and what they actually do differ. As the final step, you must test different price points to find the optimal price, which yields the highest profit. The survey will help you determine a range within which you can test different price points, instead of trying out numberless points.

As a shameless plug, we offer a competitive pricing intelligence that can help you test numerous price points without making an effort.

Reminder: The results will change over time

Each year, thousands of new e-commerce companies enter the market. That means your competitors increase in number and the customers’ expectations are constantly reshaped. If you pursue this strategy, you need to repeat your analysis regularly.

Let’s wrap it up

In the competitive e-commerce landscape, knowing the value consumers see in your products can give you significant leverage when finding the optimal price/demand ratio. The single most important indicator of that value is their willingness to pay. To measure their WTP, you should follow the steps below:

  • Segment the market into buyer personas
  • Survey your buyer personas about their WTP
  • Analyze the data you’ve obtained
  • Test different price points within the ranges you’ve got out of your analysis to find the optimal price/demand ratio
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