All popular methods to measure willingness to pay assume a well-informed consumer in their standardized form. This consumer is not only well-informed but also acts prudently when spending money because of an assumed ability to judge all product features and influences in an unbiased and objective way. As tempting as this assumption may be – especially in the age of the “Informed Consumer”: In the daily life no one of us is such an economic benefit maximizer.
Since we are not such economically rational Econs (Homo oeconomicus), but much rather emotionally charged Humans (see Richard Thaler), it is worth to determine which factors really have important influence on willingness to pay and purchase decisions.
MODEL FOR MEASUREMENT OF INFLUENCING FACTORS ON WILLINGNESS TO PAY
In reality purchase decisions are rarely made entirely rational; instead, they are subject to other, important factors. In order to measure individual willingness to pay we use a model that takes into account several dimensions of the decision. In particular, the willingness to pay of the respondents is mainly dependent on the three factors of price engagement, brand engagement and performance engagement.
A special method evaluates how important price, brand and performance of a product are to each respondent in a particular category. While, for example, a high price engagement leads to a lower willingness to pay – price plays an important role, a high brand or performance engagement lowers price sensitivity. If a product’s brand and/ or performance are very important for a consumer then usually the price is not that important anymore.
Five different consumer types can be identified from the different groups. All types are hierarchically interrelated among each other. In particular, there is a strong hierarchic connection between brand and performance engagement, since brands usually involve a higher performance expectation. Consequently a high brand engagement implies a higher performance engagement: If a person insists on Mercedes or Apple, then the product performance of these manufacturers will also be (very) important to this person.
In this model every consumer type can be visualized according to their engagement. Red signals high, grey low engagement. A high price engagement signifies that the persons looks out for low prices while a person with low price engagement is ready to pay a higher price.
Based on the three engagement factors five different consumer types can be determined, that differ significantly in regards to their product knowledge and information preferences.
PRICE AWARENESS AND WILLINGNESS TO PAY
Another important precondition for a valid measurement of willingness to pay is the actual price awareness. Not all respondents can make reliable statements about their willingness to pay. While one group does not have any price engagement and thus thinks little about prices, others may not even care to remember them. However, for a valid measurement of willingness to pay price awareness is indispensable.
- Price plays an important role during the purchase
- Valid information about willingness to pay is available
- Price does play a role during purchase
- A valid measurement of willingness to pay is not possible (because of lacking awareness)!
- Price doesn’t matter during purchase
- Measurement of willingness to pay is neither possible nor necessary.
In other words, valid data on willingness to pay can only be asked from some respondents. There are respondents who care about prices but since they do not know anything about it no valid measurement or evaluation is possible. Consequently, not all respondents should be considered for the determination of willingness to pay.
At this point a factor modeling is helpful: Respondents without price interest and / or price awareness can be substituted by similar persons with the same purchase-relevant characteristics. By matching respondents with the same group membership valid statements about the willingness to pay of respondents with insufficient price memory can be construed.
TARGET GROUP ORIENTED PRICING STRATEGY
The PSMPlus method can measure very precisely the price sensitivity of different consumer types. By factoring in each respondent’s individual focus on price, brand and product performance the identification of target group specific price points. For example, if planning an aggressive pricing policy the PSMPlus method can determine the price point that is especially appealing to price-conscious consumers. In addition, the price that brand-oriented consumers would still accept can be identified.