As a SaaS business owner, effective product pricing is paramount to your success. Enter "willingness to pay" (WTP). Understanding what WTP means and how it operates in the context of SaaS can make all the difference in maximizing revenue and customer satisfaction.
Let’s take a deep dive into the concept of willingness to pay: what it is, why it matters so much, factors that can influence WTP in the SaaS world, and what you can do to affect and increase your consumer base’s willingness to pay for your product.
What is willingness to pay?
Within SaaS, WTP is the maximum amount that your customers are willing to pay for your product. It encapsulates the perceived value your SaaS provides to your target audience.
The exact WTP for each individual SaaS business will vary widely based on different demographics and fluctuates over time. That means WTP can’t usually be nailed down as a specific dollar amount. Instead, it’s typically presented as a price range.
Why does willingness to pay matter?
A customer's willingness to pay will affect the decisions you make—from product strategy to distribution to sales and marketing—but the biggest area WTP will affect is your pricing strategy.
When you track willingness to pay over time, you are, in essence, tracking the market demand for your product and others like it. And that’s where the importance of WTP becomes about basic economics. Knowing the demand for your product (as well as the supply available) is the best way to determine a competitive pricing structure, along with more specific details like whether or not you should offer tiered pricing, how many pricing tiers you should create, what features should be included in each tier, etc.
What factors influence willingness to pay?
There are plenty of moving parts both within the marketplace and within your own company that influence your consumer base’s willingness to pay. Let’s talk about just a few of them.
When you strip down the concept of willingness to pay to its most basic parts, you realize that it’s mostly about the human perception of value. If your product’s perceived value is lower than its cost, you’re either going to struggle bringing customers in or you’re going to experience crushing amounts of voluntary churn. On the other hand, if customers truly believe that your product solves their pain points effectively, they’ll pay more for that product.
The biggest problem here is that the perceived value of your product is not going to be the same across your entire customer base. Because as much as WTP is about economics, it’s also about people—how they think and how they behave. And even amongst a singular customer base, you’re going to find that people are different when it comes to their willingness to pay at certain price points. Later we’ll discuss strategies you can use to take this knowledge and leverage it in your (and your customers') favor.
No one is an island, and neither is a SaaS business. So no matter how unique your SaaS product is, you’re guaranteed to have at least a few competitors out there. And the pricing strategies of those competitors can influence your customers' expectations regarding pricing and their WTP. Being aware of your competitors' pricing can help you position your SaaS product effectively.
Market trends and pain points
The market at large can have a major effect on WTP, and the market is constantly shifting. That’s why staying abreast of market trends and technological advancements is vital. For instance, if you’re offering something that dovetails with a trend in the marketplace and little competition exists (think AI solutions at the beginning of that boom), then your customers are likely willing to pay more for those kind of cutting-edge solutions.
How can you determine and leverage willingness to pay?
You know by now how influential WTP is for the success of your SaaS company. But how exactly do you determine your specific customer base’s willingness to pay? And, even more importantly, how do you take that information and leverage it to create the maximum amount of win-win situations for you and your customers?
Determine WTP and your price point
First, do the research. Talk with your ideal customers.
If you already have an established customer base, the best way to do this is with the Van Westendorp price sensitivity model. This customer-research-based approach to WTP simply involves asking your customers four questions and analyzing their responses to calculate your ideal price range. You’ll want to ask your customers these questions:
- At what price would you consider the product to be so expensive that you wouldn’t consider buying it?
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good?
- At what price would you consider the product starting to get expensive, so that it’s not out of the question, but you would have to give some thought to buying it?
- At what price would you consider the product to be a bargain—a great buy for the money?
With these questions, you’ll be able to assess the high and low range price points for your product and determine the price point at which you’ll maximize your revenue potential. The graph below offers an example of this type of price sensitivity analysis.
Offer tiered pricing
We’ve discussed how a huge part of willingness to pay is the perceived value of your product. And that’s why, when it comes to pricing strategy, tiered pricing can be so powerful. When you offer tiered pricing, you have the ability to price your product along a value metric.
Not only does this allow you to charge customers more as they receive more value from your product, but it also allows customers to see clearly what they’re paying for and how they receive more value at the higher priced tiers. Once you’ve conducted your customer research and determined your price range, you have all the data you need to break down your various features and functionalities into suitable pricing tiers.
Leverage your cancel flows
You’re always going to have customers who push that cancellation button, and the reasons they do it will vary widely. Sometimes there’s nothing you can do to retain them. But oftentimes even customers who are in the process of cancelling can still be retained. And a big part of that is based on their willingness to pay.
Think of it in terms of movie theaters. Theaters often offer cheaper tickets to students and senior citizens—not because it’s somehow cheaper to seat those people, but because they know those customer segments are typically more careful with their spending. In other words, their willingness to pay is lower. By offering them cheaper tickets, they take customer segments from whom they would have garnered no profits and turn them into customers, albeit at a lower rate.
The same holds true for your customer base. Sometimes you can’t increase a customer’s willingness to pay. But, instead of losing them as a customer altogether, you can offer them a lower rate that matches better with their WTP. That’s why it’s so important to optimize your cancel flows to include targeted discounts and/or the option to switch to a lower pricing tier.
What can you do to affect willingness to pay?
As we’ve discussed, WTP is based on many factors and moving pieces and is constantly shifting. But the good news is that means there are actions you can take to affect your customers’ WTP.
Perfect your value proposition
Make sure you’re conducting thorough customer research to identify pain points repeatedly. Then, confirm that your product addresses those pains effectively. Perfect your messaging so that you’re clearly and simply stating your value and what sets you apart from the competition.
Focus on customer education
Invest in resources and content that educate customers about the full range of capabilities your SaaS product offers. Sometimes, customers may not realize the extent of the value they can derive from your solution. You can often increase their WTP simply by giving them more educational resources.
Always be improving
Product updates and new product development is essential when it comes to increasing your customers’ WTP. Customers are more likely to pay higher prices if they see a commitment to innovation and improvement and continue to receive more and more value from your products. This is what we like to call the "winning team" approach.
Increase brand awareness
While a lot of the focus needs to be on your product when it comes to increasing WTP, you also need to give some attention to your brand at-large. The influence and power of your brand can play a key role in your customer’s willingness to pay.
Let's use Apple as an example. Yes, the quality of their products are important. But a lot of their customer base’s willingness to pay the high sticker price comes from the power of the Apple brand more than the individual products. Few people realize just how much Apple spends on marketing and promotion: in 2020, for example, they spent $1.8 billion on on it.
Building brand awareness is huge for WTP, and it all comes down to an effective marketing strategy. With the right marketing and strong brand awareness, you can give your product an edge and increase your customers’ willingness to pay, even if there are competitors at lower price points.
Offer free trials and demos
By offering free trials or product demos, you allow potential customers to experience the value of your product firsthand. This can boost their confidence in your product and increase their WTP.
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