To understand what customers or users are willing to pay means understanding what value they associate with your product or service. We can take a guess, pick a ballpark number, or use our instinct — but 9/10 times we’ll probably be off the mark. On top of this, we will likely need to be able to explain why our price point is what it is, that is, effectively communicate the value we provide/create for specific customers. However, there is a way we can do both at the same time and surprisingly fast!
Define your target customer
First up, we need to be super clear on who is our target customer. It is easy to fall into the demographics trap here and solely focus on age ranges, income brackets and genders. However, I’d suggest you think much more about behavioural segmentation/targeting. This could mean defining customers by specific activities, outlooks, associations or needs.
A great example of this is Spotify’s infamous ‘Lean forward/Lean back’ behavioural segmentation: When looking to categorise their listeners, instead of creating n-number of complex demographic segments, they identified and defined two main behavioural archetypes with very specific needs: ‘Lean forward’ being those who mostly knew what they wanted to listen to, and ‘Lean back’ being those who wanted good music to be curated for them.
When we are figuring out our initial pricing, it’s always worth focusing on one behavioural group at a time, so don’t be prepared to pick a side or use case! We can always run the same exercise again with others. However, make sure you start with your best bet!
Bring the product/service to life
We need to be able to bring our product or service to life for the target customer to help them understand what it could mean for them. The trick here is to focus on articulating what it can do for them, and what outcomes it can drive in their life/work/endeavours.
If we have a live product already, great! We just need to think of the best way to showcase the key outcome for the customer and how it achieves it in about 3-5 minutes. This would likely be a bit of a walk-through of the landing page and a product overview/demo. If we are conducting discovery conversations, we can simply walk through the product ourselves. If this is a survey, we might need to create a short video with a voice-over.
If we don’t, no worries, we can also use value propositions, user journeys, sketches, or wireframes. Again, the two key things we need to articulate with our artefact(s) are 1. what our offering could do for them, and 2. indicatively how it might do it. We want to make it real enough to be understandable and believable, without the customer having to do mental gymnastics, but at the same time, it does really only need to be just-good-enough to be understood (aka don’t waste time gold plating!).
Ask the four magic questions
Once we have taken the customer through our product or service and helped them understand what impact it could have on them, we want to ask a series of simple questions in a very specific order. Let’s go through them:
Reflecting on everything I have just shown you, I’d like to understand:
What would this be worth to you? Why?
In your opinion, what would be a cheap price for this? Why?
In your opinion, what would be an expensive price for this? Why?
In your opinion, what would be a fair price for this? Why?
The answers to these questions give us the boundaries of each participant's perceived value based on what we have shown them. This gives us the input and space to triangulate and make a call on where we should set our price points based on multiple conversations/responses. These questions also help us avoid undershooting the mark and missing out on revenue that our target audience might have been happy to provide (i.e. between cheap & fair), while also knowing where we will need to start working hard to justify our price points (i.e. between fair and expensive).
At the same time, following each question with why helps us build a picture of what drives these price points. We can use these insights to help prioritise what we want to build or improve, and also better communicate the value behind what we are offering.
PS if you have a specific revenue model in mind already (f.e. monthly subscription), you may want to prompt the participant to provide their answer in that form (f.e. what would be a cheap price for this, per month).
Common value drivers
A multitude of different things make up the perception of value, so it’s always worth keeping this in mind when analysing or synthesising our data from these questions, to ensure we are correcting for any assumptions or biases.
There are some common things that affect perceived value that we likely have implicitly included/excluded from what our participants reacted to like: Branding, images, and tone-of-voice (think Bentley vs Kia imagery); Associations with people, places, activities, brands (aka halo/comparative effects); Pricing/payment structures (aka one-off vs subscriptions vs usage vs BNPL); It doesn’t necessarily matter if we did or didn’t include these things in our testing artefacts, as long as we try to be honest and objective about there impact on the results!
Qual first, then quant
As we are interested in understanding what drives the perception of value, as well as what is the perceived value, I suggest starting willingness-to-pay exercises with more qualitative approaches. These could be customer conversations or interviews, where we have space to deep dive on talking points raised by our participants, and/or ask lots of whys.
Once we have talked to 5 or 6 individuals and started to find common drivers of perceived value, we are then in a much better space to start to quantify the perceived value itself through lower touch/higher scale approaches like surveys etc.
I hope you found this technique helpful! Good luck with uncovering what your customers are willing to pay.