Conjoint Analysis: Willingness to Pay
Frequently asked for
We see a specific request for willingness to pay (WTP) in nearly every RFP related to conjoint analysis. Companies want to know how much they can charge if they include new or innovative features.
Unfortunately WTP is poorly defined. Companies may want an understanding of how people are willing to part with for new features, but never do define exactly what that means. Because it is poorly defined it also poorly executed.
WTP redefined
In order for WTP to be useful to decision makers, it must be defined. Here's our unique definition:
"Willingness to Pay is defined as the change in the revenue optimizing price point when the feature is included. It is product, feature and scenario specific. It provides a dollar amount that could be optimally charged when the new feature is added. It carries with it the new Units, Revenue and Profit numbers for the product at the optimized price point."
This new method can be very informative when the change in optimal price is plotted against the change in units. As in the image below.
You'll see that each feature has a difference in the optimal price point as well as the change in units at the new price point. Feature levels in the upper right will have the biggest impact on revenue (also marked by bubble size).
Alternatively, it can also be useful top plot the value against the marginal cost for delivering the feature.
Compared to the old way
The old method, used in practice, wasn't as useful for decision makers.
The idea was to record the products share, change the feature, then adjust the price (up or down) until you get back to the original share number. The amount you had to change the price was then labeled the WTP for the feature. The problem is, that is not WTP - it is called an indifference price point.
Stick with the new method - it's much better.
