Assessing Willingness To Pay In An Economic Downturn
by Cari Peek

  • Willingness to Pay

    Inflation rates are the highest they’ve been in 40 years. The economy continues to suffer from supply-chain woes and rising interest rates. All this is sparking fear of a recession on the horizon. Times like these undoubtedly lead to changes in consumer spending.

    Facing this downturn, businesses are struggling with tough decisions on whether to increase prices, and by how much. When making these decisions, it’s important to know how much a consumer values your products. What are the pricing parameters for your offerings that ensure continued customer demand, and at what point do you start pushing your customers out of your brand? How can you convince retailers or shareholders that a certain price increase is warranted, and that it won’t alienate your customers? Equally important is understanding how competitor pricing impacts consumer behavior in relation to any potential price increases you put forth.
 

Understanding Willingness To Pay (WTP) can help businesses answer these questions. This can be done via a choice modeling experiment, wherein a simulated shopping exercise is conducted with your target customers. Realistic shopping scenarios are presented to survey respondents, with details (or visuals, if possible) around the brand, price, and other product or service features. The consumer purchase decisions made during this exercise can be modeled to explain and predict outcomes. The result is a DecisionSimulator™ tool that allows product teams to manipulate market variables to understand what impact these adjustments have on consumer preference and revenue. When the right inputs are included, the results of WTP research have a substantial shelf life, often benefiting companies for 3 to 5 years.

Although WTP research can be conducted in many consumer product and service categories, the ones in which consumers most want to reduce their spending can be among the most important to evaluate in volatile times. Based on the consumer-tracking research conducted by Decision Analyst, U.S. households that are feeling the impact of inflation report they are most likely to cut spending in the areas of eating out, food and grocery, fuel, clothing/apparel, and entertainment.

Spending Cutbacks

 

In a turbulent economy, pricing strategy is critical. But it does not live in a vacuum of the other parts of corporate strategy, as my colleague Beth Horn, PhD., discusses in a recent blog. As you think about pricing, you should also consider your overall strategy, branding, product roadmap, marketing, distribution, and product/service channels.

Ultimately, taking the steps necessary to understand WTP and the implications of price adjustments can serve to benefit longer-term profitability for your organization, and help see your brand through uncertain economic times.

About the Author

Cari Peek (cpeek@decisionanalyst.com) is a Vice President at Decision Analyst. She may be reached at 1-800-262-5974 or 1-817-640-6166.

 

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