Definition
Willingness to pay or WTP is the maximum amount or price that a customer may be willing to pay for a company's product or service offering. This metric is represented in a dollar figure or as a price range. This metric helps companies understand that potential customers are always willing to pay less than the decided price.WTP can be calculated as = the maximum price a customer is willing to pay/ product or service price
Example
Companies can measure willingness to pay through various modes like market research, surveys, and experiments. Once the data is gathered they can estimate the WTP ratio for further analysis.
Why it matters
Companies with high prices or margins generally find it difficult to attract buyers. The price that a company sets influences whether it will keep or lose customers, so it's important for companies to make good pricing decisions. If the WTP is closer to a company's quoted price, there are higher chances of conversion.WTP is an important metric as it helps companies to segment their customers across demographics, frequency, location, income, and other factors.WTP also helps in analyzing costs to see if the pricing can offer a competitive advantage. Companies can also measure their pricing against competitors as customers become price sensitive when costs rise and income levels drop.