A great subscription pricing strategy is built on the balance of revenue, retention, and growth. Shift focus too far into any category, and the others will suffer.
So how do you make sure your prices strike this balance? By knowing how much your customers are willing to pay for your service.
More goes into pulling this off than you might think. Creating a balanced strategy is dependent on a clear understanding of what affects willingness to pay and how to go about calculating it.
What is willingness to pay?
Willingness to pay (WTP) is the maximum amount a customer is willing to pay for your product or service. It varies based on a number of factors but is one of the best ways to conceptualize overall demand at any given time.
Due to this variability, WTP is typically expressed as an aggregate number with a corresponding range of upper and lower limits.
Willingness to pay is not willingness to accept
Willingness to pay gets confused with willingness to accept (WTA), but they are significantly different metrics. Willingness to pay is the highest price a customer will agree to, while willingness to accept is the lowest possible price the seller (you) can afford.
6 factors that affect willingness to pay
A number of factors affect your customer's WTP. Everything from the current market environment to a customer's personal preferences has a direct impact. Take this example from a recent episode of Pricing Page Teardown:
This shows the monthly WTP for current and prospective customers of Envoy based on the size of their company.
The WTP ranges vary significantly depending on the size of the company that is considering a purchase.
Take these factors into account when determining the correct WTP for your target customers.
1. The state of the economy
When the economy is doing well, WTP is likely to increase. A general recession or issues specific to your industry will cause WTP to decrease. Watch for indicators of these general market shifts when thinking about your own subscription pricing.
2. How trendy/in-season a product is
For products and services with a high amount of seasonality, like Halloween costumes or lawn care, WTP will fluctuate with the seasons. Fluctuations like this are generally consistent and easy to track as long as you know how the market has behaved in the past.
Trendiness, however, will be much more difficult to monitor. What's trendy is highly variable and highly specific to the market you're working in, so it's important to stay on top of changes as they occur.
3. Consumer’s personal price points
Every customer has a different personal history that informs how they think about price. While it's impossible to account for each and every customer's possible background, you can examine how different aspects of your industry impact the customer directly.
For example, customers with a higher annual income will have a higher WTP and may feel more favorably about a premium or enterprise solution. Segmenting your WTP data based on these data points gives you a great way to create better pricing tiers.
4. Circumstantial needs in different consumers
Just as consumers have personal feelings about price points, their individual circumstances have a direct impact on WTP. This can be anything from their geographical location to personal goals, like the following graph of monthly willingness to pay for Headspace or Calm:
The different WTP based on Calm and Headspace users' medication goal.
If a consumer changes their goals from Athletic performance to Improve relationships, the WTP drops so much the ranges don't even meet. Your consumers will always base their WTP on their current circumstances.
5. The rareness of a product
The less something is available, the more valuable it will become. The same is true for WTP. If your customers perceive the product or service that you're selling as rare, or scarce, it will raise their willingness to pay.
While this can be used to your advantage, increasing the rareness of a product too much can make it seem unattainable for some customers. Always consider your individual buyer personas to make sure you're not pricing too far outside their grasp.
6. The quality of a product
Consumer perception of quality has a direct impact on WTP in much the same way as rareness. The higher the quality, the higher the willingness to pay. We saw this in our Pricing Page Teardown of Disney and Netflix:
Differences in WTP for Netflix and Disney based solely on perception of the brand.
Disney is a much more well-known brand with an established track record for quality entertainment. That raised the overall monthly WTP by almost 50%.
How to find your perfect WTP
We hate to tell you, but there is no “perfect” WTP. Finding the right variable for your company requires a lot of research and continual reevaluation. Reassess consumer willingness to pay every six months to ensure you're still in line with current market conditions.
So, how do you collect this data?
1. Business metrics
We have the largest subscription pricing data set available and the tools and knowledge to use it. We can help you find and optimize your WTP data. Sign up for a free pricing audit today to chat with one of our team members about your current pricing needs.
2. Consumer research
Finding the right WTP for your product requires an in-depth understanding of consumer demands. This research will help you create better-qualified buyer personas, which helps you create a pricing strategy that is optimized to the customer.
Two example buyer personas include feature preference, average WTP, CAC, and LTV for two different types of customers.
3. Direct/indirect surveys
Surveys are the best tool you have for finding out what individual consumers value and to assess their WTP. Two types of surveys are particularly effective in this case:
- Direct surveys - Ask customers about their WTP for certain products or services using open-ended questions.
Direct willingness to pay survey example.
- Indirect surveys - Give customers a series of different products or services to choose from and ask which of the options the customer is most willing to pay for.
4. Market data
Whether you're new to the industry or an established brand, the market has an impact on WTP. Research how your competitors price their products, and you can build a great baseline for finding your own WTP.
Instead of spending time doing the research on your own, use our Analytics software to help you streamline the process.
5. Customer surveys
Your customers are a great source of actionable information about WTP. They're able to provide direct answers based on their experiences with the product, which can surface more insights than the hypothetical questions you're asking consumers.
Willingness to pay examples
We've done a lot of research on the effects of WTP on different companies in our Pricing Page Teardowns. Here are three examples showing how each company could use WTP to improve their pricing strategy.
Spotify's standard plan is $9.99 a month, which is right in line with overall WTP in the 7,458 survey respondents we talked to:
Overall WTP for Spotify.
But what is interesting is how big of a range there is. Based on our data, Spotify customers are willing to pay between $5 and $15 for their monthly subscription. This indicates that there's an opportunity to differentiate with some additional pricing tiers, which Spotify has done with their Family plan.
The problem is the plan is only $14.99 a month. Based on our research, that's under the WTP for people who are looking for a plan for up to five users:
Willingness to pay for different features of Spotify.
Using this WTP data, it looks like Spotify could definitely raise that price by at least $3 without an issue, and even up the price to $25 for some consumers.
By researching WTP, we were able to show that Spotify had an opportunity to increase their prices significantly for their Family plan.
For Amazon, we found a lot of interesting data based on different customer segments. By surveying 11,089 Prime customers, we found that age and annual salary were two of the biggest factors impacting WTP for their product.
Willingness to pay for different age brackets of Amazon Prime customers.
In 2014, Amazon Prime was only $7.99 a month, which they raised to $9.99 first, then finally $12.99. That took them from $95.88 per year to $119.88, then $155.88. That first jump put Amazon in a great position to capitalize on every age bracket in our graph.
The second jump actually put them above the average WTP based on age but was a great choice for the upper salary brackets shown below:
The effects of annual income on annual willingness to pay.
Amazon is pretty much spot on with the $100K to $150K annual salary bracket, which indicates to us that they're going more upmarket with their positioning to capitalize on the increased WTP.
Ecommerce store provider Shopify is one of the companies we found that did the best job of pricing for their customer's WTP. They offer a $29 basic, $79 premium, and $299 enterprise tier for customers. When we break down WTP based on gross merchant volume (the amount of sales they made in one year), they're right in line with the data.
Willingness to pay for Shopify customers based on annual shop sales.
Their basic package appeals to people who are just getting started, and their standard plan moves up nicely into the $1.01M to $5M per year range. From there, you would think that $299 was a big leap, but it's actually under the WTP for larger companies doing $15.01M+ per year.
Shopify's pricing tiers grow at approximately the same rate as their customers. The more successful a customer is, the more they're willing to pay and the more features they're likely to need. By structuring their pricing in this way, Shopify makes it easy to grow alongside their customers.
Knowing what your customers are willing to pay for your product or service is necessary to build an effective and competitive pricing strategy. Without this information, you're simply guessing.
With ProfitWell's help, you can find and validate your own WTP. Reach out for a free pricing audit today!