Question: Hi Mark, How do you measure customer’s willingness to pay when data is unavailable or sparse? – J
Answer: Hi J,
By saying “data is unavailable or sparse” says to me you were hoping to use actual purchase data to determine Willingness To Pay (WTP). I applaud the thought, but many companies find this very challenging, even ones with tons of data. The key reason is they have data on their prices and buyers’ purchases, but they don’t have competitors’ prices or see the deals the competitors won.
A Couple Methods to Determine Willingness To Pay
The fastest and easiest way to learn WTP information is to use Van Westendorp’s price sensitivity meter. You start to get a good feel about WTP in the market after only a dozen or so interviews. There is research that says this method tends to underestimate WTP, but it gets you in the ballpark.
Probably the most accurate is to use Conjoint Analysis. This is where a buyer makes 20-30 choices between alternatives and from that you can statistically determine what decision they would make given any sets of alternatives. As long as price is one of the attributes in the study, you can pretty accurately determine WTP.
There isn’t a single answer to this question. There are many methods with many tradeoffs, but these two techniques are a great place to start.
Hope this helps.
Tags: ask a pricing expert, pricing data