Really? Do you take a ruler and measure its length or a beaker to ascertain its volume? It may seem inexplicable, but customer satisfaction is quantifiable.
Willingness to Pay
Let’s pretend that you like cookies. A box of it might be priced (P) at $2.50. And you LOVE cookies. So, are you willing to pay $2.51? What about $2.52? Or $2.53? And so forth … until you reach a point where you’re no longer willing to pay (WTP) for the cookies.
When it comes to microeconomics (the economics that deals with the factors that influence individual decisions, such as those of your customers), there are three items to consider.
- Willingness to Pay (WTP)
- Price [you charge] (P)
- Cost [for you to produce] (C)
WTP – P = Happiness. The difference between your WTP and P is the quantified happiness. For my economics junkies, this is closely correlated with consumer surplus.
P – C = Gross Profit. The difference between your Price and your Cost (COGS or cost of goods sold) is your gross profit (before taxes and other expenses). For my economics junkies, this is closely correlated with producer surplus.
WTP – C = Size of Wedge. To put simply, the bigger it is, the more likely that you will win. Everyone likes to win.
How to Win (Increase the Size of Your Wedge)
To sum it up, the best ways to win are to:
- Increase WTP
- Decrease C
- Increase WTP and Decrease C
The last option is the best option. If you can increase your consumer happiness and reduce your costs at the same time, then everybody wins.
Consumers would be more willing to buy again or share with friends. With lower costs, you have more profit. The next questions are how to increase WTP and lower C.
I will write about these strategies in the next articles. This post is important to help you establish the foundation for what is to come.
I know that I did not get into the formula for how to measure consumer satisfaction. To be honest, it’s very complicated and not worth explaining for our purposes. The takeaway is that you want to reduce C and increase WTP.
- Can You Measure Your Customer Satisfaction?
- Learn to Lower Your Costs (C)
- Increase Your Customers’ Willingness to Pay (WTP)
- Is Inimitability that Important?
- Operational Effectiveness Drives Costs Down
- Why are There Variations in Prices?