9 Factors that Affect a Customer's Willingness to Pay

Willingness to pay (WTP) is the maximum amount an individual is willing to hand over to procure a product or service. The price of the transaction will thus be at a point somewhere between a buyer's willingness to pay and a seller's willingness to accept.

If a company understood customer willingness-to-pay before any negotiations commenced, they could develop strategies to realise that price during the negotiation. Salespeople rely on their experience and selling skills to draw out this information using historical data and value-based pricing methodologies to understand how a customer values their products.

PRICE V QUALITY EFFECT

Buyers will be more willing to pay if they believe that a higher price signals higher quality.

UNIQUE VALUE EFFECT

If the buyer values the unique attributes of your product they will be more willing to make a purchase. In a nutshell, they value your product above others in the marketplace.

EXPENDITURE EFFECT

Buyers are less willing to buy an item the higher the total expenditure, both in pounds and pence terms and as a percentage of their income and/or budget.

THE EFFECT OF CUSTOMER CHARACTERISTICS

Several pricing studies have found that customer characteristics may influence WTP. These differences in WTP may depend on demographic, psychographic, or behavioural characteristics.

The demographic variables include age, sex, race, income, marital status, education, and geographical location as well as psychographic variables such as activities, interests, opinions and lifestyle.

ENVIRONMENTAL EFFECT

Macro environmental factors such as the overall state of the economy could influence customer willingness to pay. For example, in a downturn in the economy the customer's willingness to pay may be lower as compared to a period when the economy is booming.

FASHION EFFECT

Fashions increase the demand for certain products and services and consequently increase the customer willingness to pay for those products.

FAIRNESS EFFECT

If the customer perceives the price to be fair in comparison to similar products on the market they will be more inclined to buy.

CUSTOMER RESEARCH EFFECT

If the buyer perceives that the current price is temporarily lower or higher than it will be in the future this will influence the timing of their purchase.

TWO-FOR-THE-PRICE-OF-ONE EFFECT

Or, 3 for 2 effect etc. The buyer wants a bargain of course, to believe they are getting something for nothing. They are statistically less likely to buy a single item than a 'bundle' of items.