Circumstances That Greatly Affect Your Customers’ Willingness to Pay
Circumstances That Greatly Affect Your Customers Willingness to Pay
When it comes to willingness to pay, things change and that’s a fact. Take the purchases that you make. Changes in circumstances will affect your willingness to pay when thinking about making a purchase. Your willingness to pay will change because your value perceptions will also change according to various circumstances in your life.
I have an illustration that is helpful when seeing how someone’s value perceptions can change depending on the circumstances. For instance, take a commodity like gas, when the tank is nearly bone-dry, it is different when driving a sick child to the emergency room compared to when driving to see the in-laws on a Sunday afternoon. For the first scenario, you’re going to pay just about any price for whatever gas is available. The price is not important, getting gas is. However, for the second scenario, what’s the big rush; you can look around for gas that matches both your budget and willingness to pay. There’s no need to make a snap decision to make a purchase.
It’s the same when you want a cold can of soda at the checkout counter; you convince yourself that it’s a good deal, but you also know (not at that moment in time) that there’s a 2-liter bottle of the same soda (admittedly not chilled) just a few feet away from the checkout counter that is significantly cheaper than the chilled can. So why do you buy the can over the bottle? Let me explain.
So, retailers use the concepts of “buying psychology” to understand their customers’ purchasing habits as well as for setting their prices. They understand they need to deliver a perception of value and customer satisfaction. So that cold can of soda is really good value on a hot day and you know that you deserve it, so you don’t need to seek out the cheapest alternative. What’s surprising though is that some companies work in the complete opposite direction.
Take Ikea as an example. This link (https://i.imgur.com/3zjB6Mu.jpg) clearly shows that the type of weather affects the price of an umbrella. When it’s raining the umbrella will cost you $4.99 but when it’s fine it’s nearly double the price at $9.99.
This would be the complete opposite of what I would normally do. However, IKEA is no fool when it comes to pricing. You see, they set the price of a product first, then they figure out how to manufacture it to meet that price, so maybe they planned the umbrella to be $4.99 all along and they use the $9.99 price to show the customers that they are really “the good guys.”
But IKEA is not alone in this pricing practice. For instance, I’m sure you have noticed food vendors doing the very same thing; when it’s a heatwave you’ll get a discount on ice cream or even that cold beer. And that’s just a couple of everyday examples.
This type of pricing practice is an easy way to increase sales. But there’s a price to pay – it totally zaps the company’s profit margins, unlike the retailer who sells the cold can of soda at the checkout counter. With the “heatwave” example, the hot weather is already giving potential customers a reason to buy. So, is there any need for a discounted price on the ice cream and cold beer to further entice them to make a purchase? However, this may come as no surprise to you. For instance, in a recent study by Sjofors & Partners, we discovered that 88% of American CEOs firmly believe that increasing sales volume is the best way to increase their profits. Yet they miss that in fact, the better way to increase sales volume is by setting better prices, by adding the most optimum price to a product or service. By using the term “better prices,” I mean to reduce the practice of discounting and take full advantage of how different circumstances alter a customer’s perception of value and their willingness to pay when they come to make a (potential) purchasing decision. For instance, like in the soda example above.
I want to share with you a personal example that shows how a different circumstance can alter perceptions of value and how this can be used to successfully charge higher prices to potential customers.
About a month ago, there were some unusual things happening on my computer. My first thought was that it must be a virus infecting the system. I use a Mac, and my perception is that there are not many viruses around for Macs, as well as Mac’s security is supposed to be better than a PC’s. Nevertheless, I managed to find an antivirus software program for $39.95 or the other option available, use the free version that would only tell me if my computer was infected or not, without actually removing any viruses (if any were found). Well, that’s an easy choice to make. The free software got to work and in less than a couple of hours, a popup informs me that my Mac was infected with a virus. This popup also gave me the option to buy the very same software, but now for $79.95, and have the virus removed immediately. So, you see, the circumstance of the purchase had now changed, and the vendor obviously made the assessment that my perception of value had changed too. Now knowing a virus was infecting my Mac, my perception of value was higher compared to when I just suspected viruses might be present. Therefore, the vendor could charge a higher price. It’s probably a correct assumption, but is it legal to do so? Actually, yes it is. I’m pretty sure that many people will pay $79.95 for the software on the popup’s advice, just for the convenience of removing the viruses immediately. However, there will be other people who will follow my lead and do exactly what I did; I went back to the vendor’s website and purchased the software at the initial price of $39.95. Okay, I needed to re-scan my Mac, but that was no big deal; I did save $40 and that was a big deal.
There’s a really valid point I want to make here, and it is that companies need to carefully consider how different circumstances among their customer base generate very different value perceptions and willingness to pay for its products or services and that this can be translated into prices that can both increase revenue and profit as well as increasing customer satisfaction at the same time.
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