As a small business owner, you spend a lot of time hoping that people will buy your products, but what if you didn’t have to hope, what if you could know? To take it one step further, what if you could not only know they will buy, but at what price. Life just got a lot easier. To do this, we’re going to review a customer discovery technique that’s called, “Willingness to Pay”.
What is Willingness to Pay (WTP)?
Just like it sounds, ‘willingness to pay’ refers to the maximum amount of money, ie. the maximum price, a customer is willing to pay for a particular product or service. And believe it or not, you can just ask people. Crazy, right?! But, to get the best results, you need the right approach.
“If people aren't willing to pay, or not willing to pay enough to cover your costs and provide a healthy, but fair profit margin, this is a giant red flag.”
Use Customer Discovery and WTP to Find Out if Your Business Idea Has Potential
This willingness to pay is not just going to help you zero in on a price point, but will help you determine the overall viability of your business idea before spending too much time and money on the development of your product. You’re trying to discover if potential customers see enough value in the benefits of your product to be willing to pay for it. This is critical because when there’s no, or little, willingness to pay, it tells you that your business idea is flawed somehow.
If people aren’t willing to pay, or they’re not willing to pay enough to cover your costs and provide a healthy, but fair profit margin, this is a giant red flag. Something is off and the sooner you figure this the better. So with this real life feedback, you can know, even before you have started to even build your product, whether or not your business has a chance. You may have to improve your product, or even start over, based on customer feedback, but in either situation, you’ve stopped yourself from wasting thousands of dollars and hours of your time making a product that nobody wants.
A Simple Survey Technique to Discover a Customer’s WTP
One approach to finding out what potential customers are willing to pay for your products or services is to use this simple survey technique.
Step 1: Start with an assumption or hypothesis about how your product can fix a specific problem, or make life better, for a specific group of people.
This group of potential customers has one specific problem in common (ex. parents of small children with no babysitter). Find out where those potential customers spend time online and offline so that you can ask them if they would be willing to talk to you about this particular struggle. This sounds tricky, but it’s not. You just need to be willing to put yourself out there.
Step 2: Introduce yourself and tell them you’re working on something and that you’re not selling anything, but are looking to talk to people for 10 to 15 minutes about the problem they're experiencing (ex. no babysitter).
If you can, set up 1-on-1 phone or Zoom interviews as these discussions will give you the most insight. Gift cards or a small donation to a charity of their choice are other ways to incentivize people to participate. Via these discussions, you’re trying to define/confirm the customer’s ‘job to be done’. Thank them for their time and ask them if it would be okay to contact them again to get their feedback once you are closer to having a potential solution.
Step 3: With a good understanding of the ‘job’ this particular group of people needs to get done, think about all the potential solutions that would help them overcome that struggle.
Your product or service (ie. the solution) ideally needs to be the best option available.
This value proposition statement is a tool for you to put the pieces together and refer back to when you need more clarity, not necessarily a message you’re going to put out into the world.
Step 5: Next, you can begin to talk to people about their willingness to pay. This survey method is just one way to do this. Ideally, you’ll need to find 60-90 people in total for your results to be reliable.
For a fee, you can survey larger groups of people with a particular struggle on websites like www.userinterviews.com. The idea here is to split the group of participants into 3 groups of 20-30 people each. You will create and send a survey to each of the 3 different groups. The survey will show each group the following 4 things:
A mock up or picture of your product or service (if possible or necessary)
A brief explanation of how their lives are going to be better as a result of using this product/service (1-2 sentences max).
A price point.
The question, “How likely are you to buy this product? Rank from 1 to 5. (1 = definitely buy, 5 = definitely not)
Customer Discovery Willingness to Pay Survey Technique
People aren’t willing to pay
If all three survey groups say they would not buy the product (ie. most answers are scored at 4 or 5), it’s indicative that something is off. Maybe they don’t view the problem as a problem that’s serious enough to pay for a solution. It could be that you diagnosed the wrong problem. What to do: go back to the jobs-to-be-done again. It could be that there is a problem, but your solution is not the right/best solution in the customer’s eyes. Talk to more people about what the ideal solution looks like.
People are willing to pay, but the results are split
If survey participants indicate they would buy your solution, but the vote is mostly split between two price points, like $50 and $60 for example. Congratulations, you have real information that you can test further. You can consider charging $50 to maximize revenue if the profit margin you’re left with is enough. This price point would be acceptable to everyone willing to pay $50 and everyone willing to pay $60. Your choice depends on your pricing goals.
What to do: Review how much profit margin would you make if you could charge $50? If it’s not enough, how can you reduce your costs?
People are willing to pay, and there’s a clear winner
Congratulations, you have a starting price point that you can test further.
What to do: Review how much profit margin would you make if you could charge the winning price point? If it’s not enough, how can you reduce your costs?
While it's not perfect, the outcome of this survey will give you much more clarity on your potential customers willingness to pay for your product, ensuring there’s a market for your product, and giving you a more concrete starting point for pricing your products to maximize your revenue, customer lifetime value, and profit potential. If you need clarity around how to set or optimize your prices, incorporating ‘willingness to pay’ into your customer discovery process is the way to go. It may take time and even some money to find these things out, but it will be far less time and money than if you create a product that no one wants or price your products too low and end up with a business that loses money.