The WTP rule

The vast majority of companies use ineffective methods to set prices. This is unfortunate since the price really is important. If it is too high, sales level will suffer.  If it is too low, money is left on the table. Using common methods such as “cost plus a fixed margin”, “market pricing” or “pricing against a competitor” will rarely achieve the true revenue potential of a product or service.

There is also a common misconception that low price always drives higher sales volume. This is often not the case as “price” is the most powerful marketing message of the quality you offer, and too low a price communicates quality too low for the most desirable of your customers.

By considering the customers’ willingness to pay it becomes possible to set prices that are optimized to serve each segment of the market, providing the options and services they are willing to pay for. In fact, companies that do consider the customers’ willingness to pay, typically see twice the revenue growth and twice the profits compared to those who don’t.

And it is important to measure that willingness to pay by customer segment:  simple segmentation such as location, industry, demographics and similar,  and advanced behavioral segmentation where customers are segmented along lines of their value and decision drivers.