Average Customer is Willing to Pay 12.36% Price Premium for …

We have seen studies on what the average customers say they are willing to pay for:

  1. Green products
  2. Socially responsible brands
  3. Customer Service

These studies are based on polls conducted with customers, asking questions of the type (examples, not specific to any one poll):

  1. How likely are you to pay 5%, 10%, 15% … price premium for factors X, Y or Z?
  2. The current product you buy is priced at $12, will you pay $14, $15, $16 … for the same product that are produced in green/socially responsible way?

The results from these polls are quoted in the form of  “the price premium the average customer is willing to pay for the same products only enhanced”.

There are two big issues I find with any poll based study of willingness to pay:

  1. They can only measure customer’s attitudinal willingness to pay, not behavioral. That is, what the customers say and not what they actually will do. There is a huge attitude to behavior gap. Customers will say what they think is the right answer or what they think the poll taker is interested in hearing. By the time the customer gets to the point of purchase the stated WTP may not materialize.
  2. There are no average customers just like there are no families with 2.1 children. The studies do not take into account that different segments value different benefits and hence have different willingness to pay. There is no point in providing the same  product or same great customer service to all the customers.

These arguments should not be interpreted as, “no one is willing to pay premium for product or service enhancements”. After all there are at least 250 people willing to pay $33,000 for their mattresses. It is just that we cannot make business decisions based on what an average customer is saying about what they are willing to pay. For the results to be actionable, we need to find out what the segments are, how to target them, what benefits they value and what they are willing to pay for these benefits. For that we need point of sale data or at the very least a conjoint study.

There is no average customer and if there is one, what he/she says about their willingness to pay is not reliable.

5 thoughts on “Average Customer is Willing to Pay 12.36% Price Premium for …

  1. Yes, probably not even worth the effort to make an estimate. Perhaps the best rule of thumb is that stated desire is a weak market signal, only useful as a queue that it’s “time to test behavior.”

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  2. Tristan –
    Thanks for reading and your comments.
    The mental shortcuts we use to translate attitude to behavior will always have biases (optimism bias and selection bias). The closest I can think of is using Discrete Choice Modeling to compute the value customers assign to components and using it as a standin for behavioral WTP.
    You are correct in reducing the gap between when the question was asked to when the customers actually make a purchase. That is not possible in almost all cases.
    In the example you mention, it is at the point of purchase and is almost behavioral WTP.
    Hope this helps.
    -rags

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  3. Great points, couldn’t agree more.

    Have you seen any rules of thumb for guestimating a conversion from attitude to behavior? Clearly when it comes to actually paying, the numbers drop, but by how much?

    From my own experience it seems that you can start to approach the attitudinal numbers by greatly reducing any behavioral barriers to payments. For example, lot’s of people say they are willing to donate to charity. A reduced percentage actually do.

    However, if you ask someone buying movie tickets as they’ve got their wallet in hand if they’d like to donate an extra dollar, the numbers go back up again.

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  4. I ran a poll recently and asked readers if any of them have actually ticked the box on their flight booking form that they are prepared to pay extra to have their carbons offset for a few dollars. Only 17% have actually done so.

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