Willingness to pay is the holy grail of pricing, and determining willingness to pay is the core of value-based pricing.
While the intent to put the customer perspective at the heart of pricing is obviously to be welcomed, the concept of willingness to pay is misleading. To speak of willingness to pay presupposes that a particular customer is able to indicate in any situation what he is willing to pay for a particular offer and that he will only buy if the price does not exceed this threshold.
However, we are often unable to do this: can you indicate what you are willing to pay for an additional GB of data in your mobile plan? Probably not. Have you ever seen an item of clothing in a shop window and could say exactly what price you would be willing to pay for it? Not likely as well.
These examples show that there is no such thing as intrinsic willingness to pay. Therefore, we suggest that instead of talking about willingness to pay, we should speak of price acceptance. The key to price acceptance is its situational character. For example – a dress in the designer boutique will be accepted at a higher price compared to the very same dress in a discount store. Moreover, customers are more likely to buy a pair of trousers for 90 € if the most expensive one is at 150 € than if other trousers are around 50 €.
The concept of price acceptance focuses on the actual function of pricing: It is not primarily about setting the price according to the customers’ willingness to pay, but rather about shaping the choice situation in such a way that price acceptance is maximized. Successful companies demonstrate how to do this:
At Apple, mid-range devices often offer significantly more value for little more money than entry-level devices, so that customers tend to opt for mid-range devices (example iPhone 11: 64 GB version for €799, 128 GB version for €849, 256 GB version for €969).
- Real estate agents like to show customers a less attractive object first, followed by the one they actually want to sell, as this makes the second object appear more attractive.
- Venti at Starbucks and large menus at McDonald’s also have the function of making the medium options appear to be the most reasonable choice.
- Last but not least, IKEA uses the bias towards self-made products (known as “IKEA-Effect”) to increase price acceptance – and that is only one of many psychological tricks the furniture manufacturer uses. Read here what else you can learn from IKEA’s pricing & selling.
Price acceptance is not a tank that you drain, but a muscle, that you train.
The concept of price acceptance thus dispels a widespread misunderstanding: that price acceptance is comparable with a tank, which eventually becomes empty the more you skim off. You have to think of price acceptance more as a muscle that you can and should train.
Training the “price acceptance muscle” is very much like an actual muscle on the human body: Lack of training results in the muscle either weakening or at least not growing. The pricing equivalent to that is repeatedly abstaining from price increase or discounting heavily and without reason. Overstraining a muscle may result in it being pulled or torn. This is what happens if we communicate price increases wrongly and they end up being perceived as unfair. Properly trained – and you do this through pricing and selling – price acceptance can grow visibly and sustainably.
The intelligent design of the decision situation is the core idea of Behavioral Pricing. We would be happy to show you which possibilities this opens up for your offer. If you want to go more into detail on the design of the decision-making-process, its challenges, and solutions, read here. Or subscribe below to receive updates on Pricing and Selling – Powered by Behavioral Economics.