What is willingness to pay (WTP) and how to test it

Pricing strategies often focus on tactics like competitive pricing, cost-plus pricing, and price skimming, but the key to effective pricing lies in understanding the customer's willingness to pay (WTP), which is based on perceived value rather than costs or competitor pricing. Various methods can be employed to gauge WTP, including price points, Van Westendorp’s Price Sensitivity Meter, indexing against competitors, direct questions about specific price points, probability questions, "build your own" feature exercises, and mock or actual sales trials. These techniques, while not perfect on their own, can collectively help determine the most optimal pricing by aligning with customer perceptions and preferences. Emphasizing WTP ensures pricing strategies are customer-centric, focusing on the value they perceive and are willing to pay for, rather than solely on cost considerations or market competition.