How to Increase Willingness to Pay

I heard a funny story from an esteemed academic recently.

Sonia Marciano travels a lot. Not long ago, she went to a fancier hotel in London. Sonia was greeted with the normal pleasantries. At the same time, she received a brochure, highlighting some of the perks of the hotel.

• Free WiFi — Sonia liked this a lot
• Free apples — Who doesn’t like sweet apples?
• Running hot and cold water

“Call me spoiled, but I expect running cold and water as a norm just as how I expect four walls,” Sonia giggled.

Highlighting What Matters

When it comes to increasing a consumers’ willingness to pay (WTP), you not only have to highlight items that are most important to them, but to also improve on the ones with the highest variance (σ²). This means to improve the (important) areas that have the most potential for differentiation.

If you’re going to improve things that people don’t care about, it may or may not improve WTP.

Let’s pretend that you like Oreo cookies. What are some things that you might care most about? Freshness, for sure. Maybe the amount of cream. Using those two features, consider the following:

• Would you be willing to pay a little bit more if Oreo had resealable packaging? This feature would extend the life of your cookies by preventing them from going stale! Don’t you just hate when cookies go stale? You’d have to toss the bag, wasting money, and buy a new box. This resealable feature saves you money and heartache.
• Would you be willing to pay a little more for extra cream? Mm … say, “double stuffed” cream?

Now, if every cookie company offered resealable packaging and extra cream, then these items would be of low variance, or items with little potential for differentiation. It does not mean that these improvements won’t increase WTP; if they were standardized, then they’ll just increase less.

Get where I’m going with this?

Growing Your Competitive Advantage by Switching Markets

So, going back to Sonia’s situation, spotlighting running hot and cold water may not be a feature that is of great importance to her because it is standardized in America. However, for those who know about London’s ancient plumbing system, this may be a feature worth mentioning.

Taking this point further, running hot and cold water may be an even more valued asset somewhere in a third world country where there might not even have clean water. The lesson is this — If you are in a saturated market where many amazing features are standard, simply move your business to where it is more appreciated. And this is not limited to location.

For example, because of the growing competitive wedding photography industry, many artists are finding it easier and more profitable to shoot portraits. Same skill, but moved to a different area where it is appreciated more. Of course, this is only a short-term plan because other photographers would figure this out and market forces would drive prices to equilibrium.

For location based businesses, this is just as how pho (Vietnamese noodles) restaurants cannot charge more than $6 for a bowl in Asian enclaves, but could charge an outrageous $13 in western communities and there’d be a line outside. I know. I live in New York City.

Therefore, if you cannot have a strong point of differentiation, move to where it is valued. I understand that that may not be a viable solution for everyone, but that’s the easy way out. The hard way is to become inimitable.

Inimitability

To become inimitable, you must have a point(s) of difference. Businesses work hard to add variety to their products or utilize methods to get noticed by consumers. If you are not inimitable, you and your competitors would lead to an arms race in lowering of prices. Keep in mind that your point of difference will always change as consumers’ tastes and competition change.

This is less stringent for esoteric items and creative industries. The reason is because products are abstract or hard to differentiate, just as how the difference between good and great wine is hard to discern.

So, how are you different? Simply by saying that you specialize in XYZ? Does that stop someone else from claiming the same thing?

JetBlue CEO Robin Hayes

Last week, I had the privilege of attending a talk with JetBlue’s future CEO Robin Hayes (left). He talked about many topics, but one really relates to our discussion of increasing WTP.

He said that, despite having the most legroom (apparently, low variance — no one’s going to use a ruler to measure the extra half inch that he/she gets), consumers are not responding to the value reflected in the slightly higher prices. In the end, most people still book whichever flight is cheapest on Expedia.

While there are incentive programs, such as frequent flier miles, the larger public is immune to such inducements. Therefore, with time, airlines are going increase revenue per flight by cramming more seats into the Economy section until it reaches safety minimums.

However, for those who do care about that extra comfort, JetBlue launched its Mint program, which is finding great success. JetBlue is stealing a lot of business from the premium full service airlines, such as Delta and so forth. Apparently, there are enough full-service flyers who cannot maintain SkyClub membership, but are not willing to fly on economy brands, such as SouthWest or Spirit. This is a form of price discrimination.

In the end, is an airline just an airline — a means to get from point A to B?

You

This might have been a lot to take in, which is why I broke this topic into several segments. Here are the burning questions:

• What do your customers care most about?
• What are the areas within what customers care most about can you differentiate yourself?
• Is this point of difference something that can be protected from copycats?
• If yes, then for how long? If no, then what can you do?

Next post will be whether or not inimitability is important. Is it that big of a deal if someone else says that he/she also specializes in XYZ? Hmm … This is definitely an issue for small businesses. If you cannot specialize, then there would be a price war.

Related Article: NY Times, “In Manhattan Pizza War, Price of Slice Keeps Dropping” — From $1.50 to $0.75. What’s next? $0.50?

Older Posts:

• 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?

Stay competitive,

Lawrence Chan

P.S. If you are a photographer who wants to learn the art of a successful portrait business, then I suggest you check out Ling Wang’s Project Relaunch Workshop.

She started a few years ago and outright charged $1,000 for portraits and recently increased to $1,500 to $2,500. The reason is because she came into the industry as a savvy businesswoman. Ling studied the market, created a business plan, honed her photography skills, and dominated the region.

Not only is Ling an amazing photographer and businesswoman, but she is also super nice. I tell Ling all of the time that I wish that I was a teenager again, so that she could take my senior portraits. She is that good (instagram).

Check out her workshop!

P.P.S. With all this talk about cookies, what is your favorite brand or type? Comment below!