Surveying Customers to Derive Willingness to Pay (WTP)
Customer surveys to understand acceptance of a product concept and map pricing can seem to be the most straightforward way to quickly understand the potential market, and you may feel that there is no better way to understand the market than to directly ask those in the market what they want and how much they would be willing to pay for it.
While we may apply surveys in many different ways to understand the spaces and the offering, using surveys to directly ask the market what it is willing to pay for an offering is a severely flawed application of the tool.
If one attempts to forecast consumer behavior in response to different prices, the evident way is to directly ask the customers. One of the first applications of direct surveys was a psychologically motivated method for estimating WTP developed by Stoetzel (1954). Stoetzel's idea was that there is a maximum and minimum price for each product which can be elicited by directly asking the customers. Studies based on this idea consist of the following two questions formulated by Marbeau (1987):
1. Above which price would you definitely not buy the product, because you can't afford it or because you didn't think it was worth the money?
2. Below which price would you say you would not buy the product because you would start to suspect the quality?"
Directly asking respondents to indicate acceptable prices is referred to as a direct approach to measure WTP. Other researchers continued to build upon this idea and research in this area became quite popular (e.g., Abrams, 1964; Gabor et al., 1970; and Stout, 1969). Van Westendorp (1976) introduced a price sensitivity meter which included two additional questions on a reasonable cheap price and a reasonable expensive price of the product under consideration. Applications of this approach can be still found in commercial applications (for example, the pan-European market research company GfK utilizes the procedure to attain critical price ranges for new or relaunched products).
Recently, several other procedures based on direct customer surveying have been established. An example is the commercial tool BASES Price Advisor by ACNielsen. The tool's procedure presents the subjects with several typical product profiles. The products can be in an early conceptual phase or already marketable. The subjects are then asked to name prices at which they consider a product to have a very good value, an average value, and a somewhat poor value. From the responses, purchase probabilities for different prices are derived. According to Balderjahn (2003, p.392) the price for “a somewhat poor" value could be interpreted as reflecting a respondent's WTP.
Quite obviously, directly surveying customers has some flaws:
1. By directly asking the customers for a price, there is an unnatural focus on price which can displace the importance of a product's other attributes.
2. Customers do not necessarily have an incentive to reveal their true WTP. They might overstate prices because of prestige effects or understate prices because of consumer collaboration effects. Nessim and Dodge (1995, p. 72) suppose that “buyers in direct responding may also attempt to quote artificially lower prices, since many of them perceive their role as conscientious buyers as that of helping to keep prices down." Nagle and Holden (2002, p. 344) observe the opposite behavior. To not appear stingy to the researcher respondents could also overstate their WTP.
3. Even if customers reveal their true valuations of a good, this valuation does not necessarily translate intro real purchasing behavior (Nessim and Dodge, 1995, p. 72).
4. Directly asking for WTPs especially for complex and unfamiliar goods is a cognitively challenging task for respondents (Brown et al., 1996). While it remains unclear whether this leads to over- or understating of true valuations a bias is likely to occur. Note, that this effect also occurs in the Vickrey auction and the BDM mechanism which were introduced in the previous section about experiments.
5. The perceived valuation of a product is not necessarily stable. Buyers often misjudge the price of a product, especially if it is not a high frequency purchase or an indispensable good (Marbeau, 1987). This can lead to an abrupt WTP change once the customer learns the market price of the product.
An empirical comparison between a field experiment, a laboratory experiment, and a personal interview was carried out by Stout (1969). In this experiment the prices for different products were varied and the changes in demand were measured. The results showed significant quantity changes on systematic price changes in the field experiment. As expected, the demand for the products decreased as the prices were raised and vice versa. For the other two methods, no significant changes in demand for the products could be measured caused by raised and lowered prices. The personal interview even contained reversals. For some respondents the demand increased when the prices were raised.
Overall, directly asking customers' WTP for different products seems not to be a reliable method. Balderjahn (2003, p. 402) explicitly alludes to the distortional effects of direct surveys and pleads against its use. Nagle and Holden (2002, p. 345) even state that “the results of such studies are at best useless and are potentially highly misleading".
As we will see in following topics, there are a few far more valuable applications of tools to understand the attractiveness and potential pricing of our offering. For this reason, I would like us to please consider the limitations of asking consumers direct "would you buy this"" and "how much?" type questions, as they may be far more counterproductive and misleading than they are valuable for our efforts.
For this reason, we will move on to the next methodology.