25% off the retail price — will you buy it ? A take on customer’s willingness to pay.

7 min readJul 23, 2021

Prologue:

Imagine you are in an upscale mall and walk into a luxury handbag store. You have been wanting to buy one of these bags for a while now and you know that the handbag usually costs anywhere from $1000 and can go upto ~$10K, but only for today and only in this location they have a sale. The sale is simple: the first 50 customers to buy that day will get a 10% off their purchase. Would you as a customer who has been wanting to buy this bag for a long time avail that offer ? I know I would because my Willingness to pay for that product is anywhere from $1000 to $10K. You guessed right, the topic we will discuss today is customers’ willingness to pay (WTP) for a product.

Topic Introduction:

WTP or willingness to pay is nothing but the maximum that the customers are ready to pay for your product or service. Note that the customers are happy to pay less than their WTP but will not pay anything more than what they are willing to pay and it is an art to figure out that range. There are so many aspects that go into a customer’s WTP but if you think the price tag is the determining factor then you cannot be more wrong (Check out my previous post on that here).

There are multiple ways someone can figure out the customer’s willingness to pay, example: conducting a user interview, setting up an auction or even running experiments with what you want to charge the users. There are so many ways to set the price but above all it helps to remember that a customer’s WTP is volatile i.e. it can change over time depending on many different factors and I want to introduce you to ways that a company can use to change the WTP numbers.

Conceptual Framework:

As I mentioned there are ways and means to increase a customer’s Willingness to pay and here I point out a few that are used prominently and things we encounter in our day to day.

Anchoring bias: In my first example I said the bag costs at a minimum $1000 and you are getting a 10% off i.e. you now pay $900.

What anchoring bias is doing is very simple, it’s setting your mind to think that the bag is worth $1000 and when you look at a discount your mind is happy because you have saved $100 but in essence the bag is probably worth $200 and you are instead paying a steep $700 over the manufacturing cost but for anchoring bias it doesn’t really matter because your anchor is the first price tag you saw.

Availability bias: Ours minds are tuned in such a way to jump to conclusions really fast with the amount of information we have i.e. however limited that might be. Availability bias is when you make decisions quickly based on the amount of information you have at hand. If you saw news about plane crashes continuously and were set to travel shortly then that’s probably on your mind and you might even decide to take a different mode of transportation when in fact a plane is one of the safest modes of transportation.

In my example I mentioned that the person shopping knows the bag costs at a minimum of $1000 and this information they have probably obtained from family, friends, internet etc. what they probably do not know is that there is another famous brand using the same materials and building their bags in the same workshops by the same workers for a much lesser price and without this information the shopper will probably think that the $900 bag is a great deal.

Availability bias is depending on the human psyche of You do not know what you do not know and no way of knowing it until you know what to look for.

Fear of missing out: I have fallen for this so many times when the deal says “Today only”, “Only 10 pieces left” etc.

Source: pixabay.com

There are so many social and emotional aspects that shape FOMO (fear of missing out) one of the main things being the peer pressure and the need to constantly be on the forefront in comparison to the rest of the social group. When the shopper saw that the offer was only valid for today they did not take a moment to think if they really need that bag today or can that purchase wait, instead they chose to buy the bag and not be worried about losing out on the deal or the product.

In addition to the above here are a few that play to other biases that we as humans are tuned to:

Confirmation bias : When you pay more attention to the information that confirms your previously held beliefs even if you know more information otherwise.

Halo Effect: If the person selling the bag resembles someone you know, trust or have worked with in the past or even someone you like from the movies etc. we tend to believe that the product being sold by that person is way more valuable.

Self-Serving bias: the belief that the decisions you have made have been thoroughly thought through because you have made the decisions with all the necessary information.

In-group preference bias: We as humans from times immemorial have divided ourselves into groups, tribes etc. if someone in the group has made decision A then that decision is probably the best one because you are also part of that group — this tends people to make the same decisions, buy the same products, dress up similarly to other people in the same group.

The other side of the coin:

Though it’s not easy there are ways you can overcome these biases, I am no expert at overcoming these biases and am still working on making purchase decisions but here are a few ideas and tips that I have been using more often than not.

Focus on the data: The current US housing market is on fire and there are areas where the housing prices have seen an appreciation of close to 40% YoY but there are also stocks and funds that have yielded higher returns during the same time frame. If you are only looking at the real estate trends and feeling dejected you might be missing the forest for the trees. Focus on the e2e data and actively seek out other data points that can help you make that decision.

Differentiate the need vs the want: This is what I struggle with the most, honestly. I always want a new outfit, I always want that new pair of shoes but there are times when I stop and think, do I really need this ? How many times will I use this pair before I am bored and toss it out the door etc. but again as I said not easy. What I think has been helping me is I have a few key questions I think of before I go shopping and if the product fits the majority of the categories I buy. In all honesty, I also buy products just because they make me happy which I think triumphs over all other categories I come up with.

Reflect on the past: There have got to be instances from the past when you have made similar purchases and regretted your decisions later, take a moment to think about those instances and that might work wonders too.

Ask someone not in your group: I tend to message my mom when I am thinking of buying something high fashion as she wasn’t in the group who spoke about this or other people who haven’t been in the group when we discussed certain products. This helps me take a measured look at whether I really need this.

Google/Bing for alternatives: We are in the high tech world and all the information is just a search away, use that to your advantage. Have the right search queries and you are good to go.

Nexus Beyond:

Every single product or service I have bought and every single site, store I have interacted with have employed some form of bias and so it is very tough to say one of them does and someone else doesn’t. The type of bias they employ is different, sometimes you know it and most of the time you do not. Be careful though because if you as a business start applying these techniques without understanding it fully it might end up backfiring.