Running a successful business involves several items, including setting good price points for products. But determining what the customers are willing to pay can be a difficult task. And for companies entering a new market or territory, local conditions have to be accounted for in any survey or research work.
OnFrontiers expert Jeff Walcott is a senior business strategy consultant focused on early-stage, socially-oriented businesses and programs. Over the course of his career he has has conducted willingness to pay studies working in several countries and offers some advice on ways companies can avoid bias and tailor studies to local markets:
Have you ever haggled in the street or bartered for a better price? How did it go? Did the vendor offer a price, to which you countered with a lower price until you met somewhere in the middle? Or did you walk away from the seller because he or she was asking too much money for their product? Without knowing it, you were conducting a short willingness to pay (WTP) study. Now all you have to do now is replicate this process so the results are representative of a target population and you’re all set. Easy, right?
Sadly, willingness to pay is one of the more difficult to assess of all business strategy inputs. But without it, it’s impossible to make informed projections of costs, volumes and financial sustainability. This is especially important in developing countries where margins can be razor-thin and setting an appropriate price point is the difference between success and failure. Asking too much for a product can leave you with a boatload of inventory and no customers. But asking too little won’t support the business. It’s a tightrope balancing act.
So let’s discuss a few of the major factors in conducting a willingness to pay study. In my years running projects in developing countries, I’ve noticed there are four major inputs to consider when conducting a willingness to pay study if you want to get it right, or as close to right as is possible:
- Hypothetical vs. transactional
- Getting your target market right
- Study bias
- Cultural inputs
The Differences Between Hypothetical and Transactional
By their very nature, most willingness to pay studies are hypothetical, meaning that despite our best line of questioning, we won’t really know how much a customer is willing to pay until we ask them to put money on the table. This is a huge constraint, especially in developing countries where people may have less to spend, as there is a vast difference between what someone may say is the right price and what they would actually pay for an item or service.
So the goal of any willingness to pay study must be to remove as many hypotheticals from the situation as possible. While this may be easier to test with small ticket items, like water or sanitary pads, where the price is low, it becomes increasingly difficult when the product being sold is large, expensive, or not a repeat purchase.
Identify Your Target Market
Secondarily, it’s also important to consider your target consumer when planning your willingness to pay study. While general research methodology dictates that sample sizes must be large enough to be representative of a population, in willingness to pay it’s also important to ensure your sample demographics your target market. Would you ask a man how much they would pay for a woman’s product? Most likely no. But this becomes more difficult when the lines between a customer and a non-customer are not as clear.
Still, when conducting research it’s more than acceptable to politely decline to finish an interview with a potential candidate because you’ve recognized they aren’t part of your target market. Not only is his or her input not helpful, it’s actually damaging, because you’re asking the opinion of someone that has no intention of buying the product, or that you have no intention of selling to.
Beware of Bias
Third, bias can wreak havoc on the results of a willingness to pay study being conducted in the field, particularly in the form of bias introduced by the interviewer. Consider the type of bias known as anchoring, which essentially means that humans tend to base decisions off of the first piece of information with which they are presented.
Anchoring can also be described as a reference point. Consider the situation where a researcher is out in the field and is asking if $5 is an adequate price for a product. This price, $5, will become the anchor for all respondents, meaning they will base their responses on this price. Just by asking the question, or conducting the study, the researcher has inadvertently introduced bias.
Removing this bias means interviewers should start with a carefully planned reference about what prices they offer, and if these are really tied to potential costs of the business. Additionally, interviewers should offer different customers different prices to gauge and compare reactions.
Adjust to Local Cultural Norms
Finally, culture is enormously important when organizing and implementing a willingness to pay study. Different cultures respond to questions differently, and even respond differently to the prospect of buying a product.
Consider Bangladesh, with a culture known for its proclivity towards negotiating on the street for better prices. A willingness to pay study has to be conducted differently here than in a country like Kenya or Zambia, where customers may be less used to being asked their opinion. In Bangladesh, because of this cultural affinity towards bartering, it’s possibly a better approach to start your price on the higher side, expecting people to immediately ask for something lower as opposed to simply accepting the offer.
All in all, there is no one correct answer to willingness to pay studies, which is a reason they are so difficult to get right. Every situation needs to be considered in isolation before conducting any research, taking into account the factors above.
While no measurement will be perfect, planning ahead and carefully strategizing your willingness to pay study can make a huge difference for your business and your customers. And remember, sometimes the product and the price just won’t match. Walking away early, or going back to the design table, can offer as successful an outcome as finding a perfect price.
* Views expressed in this article are those of the author and not of OnFrontiers *