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Willingness to Pay: It's More Complicated Than You Think

Willingness to Pay, It’s More Complicated

Published: March 9, 2024 | By Chris Mele |

Willingness to Pay is Complicated for Software

To read the original Forbes article, click here.

Forbes: To Land On The Right Pricing, Software Leaders Must Look Not Just Outward, But Inward As Well

Many software companies rely too heavily on simplistic outward-facing strategies to determine pricing, such as basing prices on competitors or asking customers about willingness to pay.

As I’ve previously written, basing pricing solely on competitors is flawed because what works for one company may not work for another. In addition, competitors likely based their own pricing on faulty assumptions.

One of the more egregious assumptions is that directly asking customers what they are willing to pay results in accurate answers.

Willingness to Pay is Complicated

Software is an experienced good: customers don’t know what they are willing to pay until they use it and fully deploy it into their workflows for maximum return.

Joel Spolsky, the founder of Stack Overflow & Trello, figured out the flaws of the willingness to pay concept years ago: You can get “radically different answers” from one day to the next “when you ask people how much they’re willing to pay for something.”

Consider two of the examples he used:

  • Ask “some aircraft designers how much they would pay and they sort of think $99 would be a maximum price, even though aircraft designers regularly use software that costs on the order of $3000 a month without being aware of it, because someone else does the purchasing.”
  • Give focus group participants Starbucks drinks during a break, and a “side conversation about paying $4 for a cup of coffee” might ensue, putting everyone in a “real frugal mood when you ask them about their willingness to pay.”

Van Westendorp Price Sensitivity Meter (PSM) Inaccuracies

Van Westendorp’s Price Sensitivity Meter (PSM) has been gaining popularity in the blogosphere, particularly among product managers, despite concerns about the approach that have existed for decades. It’s even been exposed as a feature in some survey platforms.

In his article, “The Price Is Right (or is it?),” which appeared in a 2002 issue of Marketing Research magazine, David W. Lyon, the founder of Aurora Market Modeling, thinks the popularity of the model comes down to two reasons:

  • The “ease and low cost of asking four simple questions.”
  • The “intuitive appeal of the questions, which sound to marketers like the things they want to know.”

Lyon posited that the Van Westendorp Price Sensitivity Meter is “used far more widely, and its results taken more literally, than they should be.” This technique introduces powerful biases that skew results. That’s because each of the 4 questions that make up the PSM are all variants of “How much would you pay for this?”

Lyon also noted that the questions invite “lowball answers” along with the observation that “a surprisingly high number of respondents give four answers that don’t show the expected relationships (e.g., their ‘too inexpensive’ price is higher than their ‘inexpensive’ price)…as many as 20% of respondents may give inconsistent figures.”

It is shocking, and concerning, how many B2B software companies use (or are planning to use) Van Westendorp Price Sensitivity Meter (PSM) to develop their pricing.

Willingness to Pay: The Biggest Contributor

In the game of oversimplifying the problem with techniques like Van Westendorp PSM, these types of approaches ignore one of the largest contributors of them all:

The salesperson’s impact on the prospect’s willingness to pay.

To understand this, you must get your hands dirty. By looking inward, not just outward, you will better understand the market realities contained right inside of your own invoice transaction and usage data.

You can read our full article on Forbes: To Land On The Right Pricing, Software Leaders Must Look Not Just Outward, But Inward As Well

 

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Chris Mele

About The Author Chris Mele

Chris is Managing Partner for Software Pricing Partners, where he and his team have launched some of the software industry’s most transformative monetization strategies. As a former software company founder and leader, Chris focuses on the impact effective licensing, packaging and pricing strategies can make on the most essential software company metrics: revenue, profit and valuation. Under his leadership, Software Pricing Partners has become an influential voice for growth-oriented software companies both large and small.

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