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Willingness to pay / price elasticity cases confusion

How do you come up with defendable / justifiable logic for determining customer willingness to pay and pricing.

How can you defend say $42 price v. $43 price?

 

Thanks

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Top answer
Ian
Coach
on Nov 10, 2021
Top US BCG / MBB Coach - 5,000 sessions |Tech, Platinion, Big 4 | 9/9 personal interviews passed | 95% candidate success

Hi there,

First, I'm assuming you only want to talk about WTP and not cost-based/benchmarking forms of pricing.

In terms of willingness to pay, you really have a few ways:

  1. Measure the exact value add to the customer. Example: If you improve their profit by x dollars, that is their WTP.
  2. Look at comparables, i.e. what else have they bought that is similar. Example: I'm selling a washing machine so I'll look at what they've spent on a dryer/dishwasher.
  3. Ask them directly. Example: A survey
Pedro
Coach
on Nov 10, 2021
Bain | EY-Parthenon | Former Principal | 1.5h session | 30% discount 1st session

You may need to better explain the question, as I am not sure I fully understand your doubt, but I'll give my best below.

Some people will stop buying above $42. So to have a $43 price you have to know how many will stop buying and compare that with the margin improvement you get from a higher price. 

Example, if at $42 you have a $4 margin, and at $43 is $5… you would need a +25% volume drop in order not to raise the price.

Now, how do you figure out if a lot of people will not take the $43 price? You need to look at the value created by the product, the competitors price (vs. value proposition), and substitute products.

Agrim
Coach
on Nov 11, 2021
Top Awarded Coach | BCG Dubai Project Leader | Master Casing in only 3 Hours | 10y in Consulting | Free Intro Call

Can you articulate the question a bit better please? More detail and more context please.

From whatever you have provided, here is what I can make out:

  • In most cases - $43 will have fewer takers vs $42. By exactly how much - no one knows - it requires empirical studies.
  • Decision making over a $1 price difference is going to have different evaluation parameters v/s a larger different (say $63 vs $42)
  • A $1 price difference on a $40+ product represents a 2.5% increment - so its not that large
  • Is this 2.5% higher price, worth the additional value that the product brings to the customer? if yes, then the customer should ideally be willing to pay and you will find takers for the product.
  • If the product does NOT bring commensurate additional value - then the product will find fewer takers.
  • If the entire market can be served by the supply of $42 products from other players, then you switching to $43 would mean that $43 will have zero takers ideally

Hope this gives you some ideas and direction to think over.

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