How To Measure Your Customers’ Willingness To Pay
Willingness to pay (WTP) is the largest amount of money an individual will spend on a product or service. Whether you set the price too high or too low makes all the difference between your startup living or dying. You can determine WTP by questioning customers directly or by providing a set of options they have to choose from. Whichever approach you decide, this isn’t easy, especially for early-stage startups. Ultimately, it comes down to how well you read the demand of your market. One startup that’s optimizing its products’ potential profitability is Brooklyn-based RepOne Strength.
“Willingness to pay is a product of a potential customers’ perceived value of your product and their desire to pay what you’re charging.” — Jordan Berke, Founder & CEO, RepOne Strength
RepOne Strength is building the automated personal trainer for everyone. Their first product enables coaches to individualize training for every athlete on their team, coaches put their sensors and a tablet on each station, upload their roster and workout programs, and RepOne’s system helps them customize training for each of their athletes. I had the pleasure of asking their CEO, Jordan Berke, about how to determines a customers WTP, how his startup measures it and recommendations for other founders navigating the early stages of building a startup. You can read Jordan’s comprehensive responses below:
How do you determine a customers willingness to pay (WTP) and at which phase of building your startup?
Get as much information as you need to get to the next milestone.
It can be argued that before putting an hour of your time into building a new company, you should figure out if somebody is willing to pay for it. I’ve learned from several founders with multiple exits, engineering can be a waste of time early on. If you’re pre-engineering you might only need a binary answer — Is there a (hopefully large) group of people that are willing to become customers? A yes + enthusiasm might be enough for you to make a decision to start building a product, and it can take surprisingly little to get there.
Common pre-engineering strategies for binary WTP:
- Landing page with an email list
- Direct surveying — ask potential customers
- Indirect analysis — comparables. Are there any?
If you’ve already started engineering or quit your day job you’ll want to start looking for traditional WTP metrics, but the earlier an entrepreneur is in the process of building a company the more jobs they need to do in the same given day. They need to build a product, talk to customers, learn the market, sell, hire, build awareness, the list goes on. Post-engineering, quantitative WTP data becomes more consequential to things like pricing, customer acquisition cost, and if you’re looking to raise capital, VC investors. At this point, it’s worth thinking transactionally — how much information can you get per unit time invested?
Common post-engineering strategies for WTP:
- Landing page with price + checkout button
- Crowdfunding campaign
- Direct sales (outbound calls)
- Letters of Intent
- Comparables — How much is currently being paid?
If time permits, careful planning can net your customer acquisition cost data while you’re trying to find your WTP.
Did you use primary or secondary research? Both?
At my company, we relied heavily on primary data sources early on. Comparatively speaking, there isn’t much secondary research in the world of sports performance technology. Sports betting, broadcasting, and audience engagement tech have some available analysis by virtue of proximity to traditional revenue channels, but data around performance tech is still in its nascent stages.
At RepOne Strength, we knew teams and gyms were having problems implementing modern training methods at scale, but we weren’t sure that problem was something they were willing to pay to solve. Our team had all previously worked together on a project that attracted quite a few sports and training organizations, which enabled our early learnings. That experience also earned us a significant network with which to start conversations. After learning that all of these teams were already paying for multiple solutions that together were doing a poor job of automating their weight rooms, we utilized our network once again to drive them towards a landing page that showed them our vision. We were able to find the conviction we needed from our target market to justify full-time product development.
After figuring out that our customers were willing to pay we needed to figure out how much, which can be complex in markets as segmented as sports and gyms. At this stage, we relied on secondary data. Due to the limited availability of things like performance tech consumer reports, we took a bottom-up approach to our secondary research by building a comprehensive list of teams and organizations in our market. We then split that list into groups based on their estimated budget and categorized them based on primary research around their likelihood of using an existing product, desire to switch to ours, surveyed level of interest in our product, etc. We then looked at their buying habits and how much they spent on comparable performance products, existing athlete management systems, and even staff they hired to do things our software could do automatically.
What shapes WTP?
WTP is a product of a potential customers’ perceived value of your product and their desire to pay what you’re charging. You can build a product that your entire market is absolutely infatuated with, but if your market is Uber drivers and your service costs $50k per year, there’s a good chance WTP is close to zero. Conversely, you can build a product that, in your research, only elicits lukewarm interest, but if you price it well below comparable products then customers could likely be very willing to pay.
Like most business metrics, perceived value exists on a spectrum, and if you find yourself looking for guidance on which end of the spectrum to build a product the answer is usually the high end (especially if you have a long sales cycle). If you’re building a product that has a large initial development cost or high maintenance costs, you might not have the luxury of choosing which end of the price spectrum you want to exist on. In that case, you can either be more capitally efficient or find a version of your product that a small group of customers are willing to pay a lot for.
What is the best way to measure WTP? Is it the maximum price a consumer will buy, the minimum amount of money a person is willing to accept or a range of prices?
The best way to measure WTP is real pricing experimentation. You can make hypotheses and test them with direct and indirect methods, but there are inherent drawbacks to every method that doesn’t involve taking a credit card number. The reality of this method is that it will likely take you some time to settle on that magic price that nets you both high conversion rates and high margins, and even longer if you’re selling to different verticals, each with their own WTP range.
A method that’s gained popularity over the past decade or so is variable pricing, where you closely monitor conversion analytics while changing your pricing and isolating your independent variable. Unfortunately, this can be a complex and involved process, potentially requiring A/B testing and order volumes high enough to increase your signal to noise ratio.
One particularly tricky note about perceived value is a concept whose name I learned from a libertarian (read: hobby economist) friend of mine, the Giffen Good (or less commonly and more accurately referred to as a Veblen Good), a product whose perceived value increases as the price increases. It may be counterintuitive to a young entrepreneur who thinks the price can give them a competitive edge, but raising your price might actually increase the amount your customers are willing to pay.
What other recommendations do you have for other founders building a company in the sports space?
Know your customers! You can’t build a great product, market it, sell it, or fundraise for it unless you understand your customer. This is even more important for a founder who isn’t a customer of their own product, or who hasn’t worked intimately with their customers in the past.
Even though I’ve been a Strength Coach, Trainer, and Gym Owner over the past 10 years, I lacked the knowledge and experience of a Strength & Conditioning Coach of a sports team. By speaking to hundreds of coaches, I learned just how little my perception of their problems aligned with their day-to-day.
We learned some fascinating things. Coaches care just as much about keeping their athletes safe as they do about winning. Their budgets generally roll over at the same time of the year, which significantly impacts their buying choices. Weight room budgets vary greatly, and some have no budget at all, meaning they need to formally request each purchase. Although the S&C Coach makes spending decisions, they need buy-in from several levels, at times all the way up to their county school board. Some schools don’t have an S&C coach at all, and some hire companies to manage their programming remotely.
WTP is integrally important to success, but it’s just one important metric you can learn from being a subject matter expert in your customer’s problems.