Question

what are customers really willing to pay for ? where can the largest margins be achieved ? can customers easily find and purchase cheaper products and services ?

Answer 1

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.

Metrics for Mastering Margins

Here are nine metrics for success, with each one corresponding to a margin lever you can pull.

• The “Early Bird Special” – This metric will help you understand how often customers accept early offers or discounts by measuring the percentage of customers who take early offers and discounts. If this happens often, then you can try different pricing scenarios to maximize profits. If it doesn’t happen often, then you need to try something new. The goal is to bring in profitable business sooner.
• Return on risk – This metric will help you maximize the value you get from the assets that you are purchasing or have already purchased. Too many organizations only focus on lowest price instead of focusing on the best value and building the best relationships with key suppliers. This variation on ROI shows that if your organization is willing to take a risk, you need to understand what the expected returns will be from that risk.
• % of margin loss per defect – This metric shows the direct correlation between profit margins and defects or failure work that is done in the organization. It puts a percentage figure on how much profit margin was lost as a result of poor quality (defect, obsolescence, recall, etc.).
• # of supply chain touch points – This metric actually reports on the number of times a product gets “touched” in the supply chain. The fewer times it get touched, the lower the risk, and the higher the margin. Knowing how many times a product is touched allows you to look at each touch point and determine if it adds any value.
• # of referrals per customer – This metric measures how many actual referrals to new customers you are receiving from existing customers. The higher the number, the lower the cost of new business acquisition and the higher your customer retention will be. This takes the NPS score one step further and actually tracks referrals.
• Strategic employee retention – Most employee turnover metrics measure the percentage of turnover for the entire organization. This metric measures retention for employees who have been flagged as key to the organization’s success. These would be key leaders, future leaders and others who hold or will hold important positions in the company. This metric will tell you if you are able to retain your top people at a higher rate than the rest of the organization. You should be at 99% or better in strategic retention.
• Average time of new customer acquisition – As more customers come to you as a result of your brand recognition, it will become faster and cheaper to acquire them. This metric shows the average time from first contact with a prospective customer to the time they actually buy something from you. This number should get shorter over time.
• % of daily tactics aligned with strategy – This metric shows how aligned the front lines of your organization are with the organization’s overall strategy and direction. The percentage should be high because what your people do on a daily basis should align with the progress your organization is trying to make. A good benchmark is 90%.
• % of revenue from new products and services – This metric shows you how much of your profitability is coming from new products and services. I would define new as anything that has been developed in the past three years. This should increase over time and be at least 25% in any given year for most organizations.

These metrics tie directly back to how you can master profit margins in your organization

10 Reasons Customers Will Pay More

Customers usually make buying decisions based upon more than just the lowest price.

Customers always want to pay as little as possible, right? Not so fast. Customers often willingly pay more for a product even when they can get a functionally similar (or even identical) product elsewhere for less. Here's why:

1. Your product is easier to buy.

Customers hate futzing around with complicated purchasing and payment options. Customers are usually willing to pay a bit more if you can streamline the process of buying from you, rather than elsewhere.

2. Your product arrives more quickly.

Customers, like everyone else, want immediate gratification, especially when they're spending money. If you can gratify your customer's desires sooner than the competition, they'll usually pay a premium.

3. Your product has a "must have" feature.

Customers sometimes fixated on a particular feature even if it's not that much use to them. I once saw a company pay a $100k extra for a publishing software that could snake text around the shape of a hand--a feature they'd needed exactly once in the past.

4. Your product burnishes the buyer's reputation.

Consumers buy fancy-branded luxury goods because it makes them look and feel wealthy. The same dynamic operates in the business world, which explains why companies are still buying high-priced, IT-intensive ERP systems.

5. Your product has a lower cost of ownership.

It's not all about price... it's about the time and money you spend after you purchase. For example, an iPad costs more than a Windows netbook but requires less maintenance, thereby making it cheaper in the long run.

6. Your customer service is more friendly.

Companies underestimate the anger (and even hatred) that business buyers feel when they experience horrible customer service. By contrast, customers will pay more when they know their problems are handled quickly and cheerfully.

7. The price difference isn't worth the hassle.

Customers will keep purchasing something that's higher priced if the difference between your price and the competitors price isn't large enough to get onto their financial radar. People don't worry about the cost of salt when they've got big fish to fry.

8. The customer likes you personally.

Customers are human and humans prefer doing business with their friends. That's one good reason that developing rapport is so crucial in customer relationships; it provides a buffer that keeps the competition at pay.

9. The customer wants something else from you.

A customer will generally pay more for your product if he or she is angling for a job in your company, or wants access to your business contacts, or is looking for, well, something more than "strictly" business relationship.

10. The customer is rapidly expanding.

Customers who are growing so fast that they're struggling to take advantage of all the opportunities usually don't have the mental bandwidth to worry about what everything costs.