Learn Your Customers' Willingness to Pay Range (A Simple Data-Driven Approach)
What Method Should I Use to Determine a Customer’s Willingness to Pay for My Product?
At Growth Ramp, we use the Van Westendorp Method to find the acceptable price range of your potential customers.
In this method, you will ask four questions:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too Expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too Cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive, Will Buy)
- At what price would you consider the product to be a bargain, a great buy for the money? (Inexpensive, Will Buy)
You will then create a line graph based on how many people responded to each price point.
Your graph should look something like this:
Not only will you find out the acceptable price range, but you will often learn how you should price your product.
As an example, one of our clients had numbers below the amount they wanted to charge. It seemed like they needed a better solution.
But after a few customer validation interviews, someone suggested a different pricing structure. Instead of doing a high flat price per month, the customer suggested a lower flat price and a percent based on the usage.
This new pricing model increased sales for our client and created more happier paying customers. I’ll discuss pricing models in the next article on creating a pricing strategy.
How Do I Create a Price Sensitivity Analysis to Find the Optimal Price Point?
In Excel, create a chart for each question you asked. You will want to compare a price point to how many people’s answers fit that price point.
Your price sensitivity table should look something like this:
Depending on how many responses you got, you may decide either to keep or remove non-buyers from this price analysis.
You may have noticed that “Too Cheap, Won’t Buy” and “Inexpensive, Will Buy” are also reversed. This allows you to get four crossing lines, as you will see in the chart below.
The price increment you use depends on what price range you notice people gave you.
It doesn’t make sense to use $10 for a $500-$2,000/month enterprise package. But $10 makes sense for a $20-$100/month SaaS product.
Once you create your line chart, you are looking for the acceptable price range. AKA, your money zone:
There are four key points you want to look for:
- Where “Expensive, Will Buy” (Red) meets “Too Cheap” (Green). This is the lowest price of your acceptable price range.
- Where “Too Expensive” (Yellow) meets “Too Cheap” (Green).
- Where “Expensive, Will Buy” (Red) meets “Inexpensive, Will Buy” (Blue).
- Where “Too Expensive” (Yellow) meets “Inexpensive, Will Buy” (Blue). This is the highest price of your acceptable price range.
You should also look at your data manually. If you notice there are two price ranges (e.g. some answering $200-$500 and others $2,000-$5,000), you may want to do price skimming. I will talk about this more in the pricing strategy article.
How should you price your product? Again, this depends on your pricing strategy.
However, my typical recommendation for new products is to price your product somewhere between the point where the blue and red lines meet, and yellow and green lines meet.
This is where you will capture the highest percentage of the market at a reasonable price. Once you get product-market fit, increase the price to the highest value in the acceptable price range.