Determining what customers will spend on your product is one of marketing's oldest challenges. But "current methods don't consider context and competition the way they should."
Marketers have long been tasked with determining consumers’ “willingness to pay” (WTP)—the maximum price a customer will spend to obtain a product or service.
Image: Shutterstock
Whether they are in the business of providing beer, BMWs, or accounting services, one of the most important decisions firms face is what price to charge customers.
Set the price too high, and you may fail to get any takers. Set your price too low, and you might achieve plenty of demand, but you’re leaving money on the table. Neither outcome is ideal, and marketers have long been tasked with determining consumers’ “willingness to pay” (WTP)—the maximum price a customer will spend to obtain a product or service.
“At its core, this is a classic problem,” says Derek Rucker, a professor of marketing at Kellogg. “In fact, it’s among the oldest and most important problems we face as marketers.”
But when Rucker and fellow Kellogg marketing professor Eric Anderson, along with Kellogg alumna Sharlene He, now a faculty member at Concordia University, dug into the literature, they found that the prevailing consensus on how WTP should be conceived of was in fact vague and missing critical components.
Moreover, most of the existing methods of measuring WTP had serious downsides. “Current methods don’t consider context and competition the way they should,” says Rucker. “That means it is possible marketers could be making business decisions off inaccurate estimates of willingness to pay.”
[This article has been republished, with permission, from Kellogg Insight, the faculty research & ideas magazine of Kellogg School of Management at Northwestern University]