Willingness to Pay (WTP) Definition & Meaning
In this article, we’re going to explain a very common business term that’s known subjectively as the willingness to pay, also known as WTP for short. We’re going to give you a solid definition so you can better understand the term, as well as give a little bit of meaning and hopefully provide some examples you can take context from and have a more diverse business vocabulary, so if you ever hear the term you’ll know what’s going on. We’ll also give you a little bit of extensive understanding about the opposite end of the spectrum, which is known as the willingness to accept.
What is the Definition of WTP?
Willingness to pay is basically how much a consumer will pay for a product, service, or related expense. This can be literally a maximum price, or even a range in between a low and high price. For example, if you’re offering a service, a good sample of this is that a client is willing to pay a certain amount as a projected budget, or a range (the projected budget or just a little more or less, depending on what your offer is). In the business sense where the price is more of a range instead of a set price, is that a product is up to the projected maximum a consumer will pay. Other conceptual economic professionals see that WTP is actually like a reservation price, which is similar to those which are on eBay, and other sites with a reserve price set when you want to purchase an item rather than spending more bidding over other customers that are of the higher price than the reserve.
Willingness To Accept
This is the polar opposite of willing to pay. When someone’s willing to accept, which is the minimum amount someone’s willing to accept for a good or service. This is similar in some senses as a reserve price, but it’s normally less. This normally happens when someone hasn’t had any luck selling a product so they keep marking it down, but they won’t accept any less than a said amount. Therefore, ultimately WTA is how low someone will try to sell something for just to get it out of their inventory. A good example of this is how certain retail chains throw items on clearance, offering sometimes up to huge discounts, but still reaping a little bit of profit from the item, compared to what they paid for it.
Willingness to Pay Changes Per Numerous Variables
There are all sorts of different things that affect how much willingness to pay actually costs. Some of these things that affect the WTP rate are things like taxes in certain areas, costs of living, the environment, crime rate, and even in the business sense, the WTP is also affected by other things, such as target audience, supply and demand factors, and more.
How to measure willingness to pay is a way of knowing how much you can see what your average consumers are willing to pay for an item or service. When business starts to die down, that means that willingness to pay is often getting lower, and that’s why many businesses offer sales, discounts, and coupons. They’re still getting a huge profit over what they paid for an item, but by offering it for 10 or 20 percent off, or even buy one get one free, they’re essentially getting a little bit of profit still by forcing you to pay the full retail price for an item. You need to know how to calculate how the supply and demand curve changes by the prices in order to give consumers a price that will entice them to buy.
What is Opportunity Cost?
When it comes to the willingness to pay, you need to also know what the opportunity cost is. This means that you need to know what you have to sacrifice when you choose to buy a product or service. That being said, an example is that you need to know how much you have to spend, and what item will give you the better reward in the long run. For example, if you see two items at a store, such as a 10-pound bag of sugar for 8 dollars, but then see that three 4 pound bags cost less than two dollars apiece, then you’re going to end up choosing the three bags even if that makes you have less room in your cupboard because of the value of getting more product.
Using Willingness to Pay in Barterin
A lot of times, people who are trying to sell an item will actually ask for someone’s willingness to pay. You’ll see this a lot on things like swap shops, local market, Facebook posts, and more. The reason? Because it allows the seller to post an item higher than their willingness to accept, and list “or best offer”, which is usually the same as asking what someone will pay for it as the buyer. By doing this, they can actually use this as a bartering tool still getting well above their lowest WTA (willingness to accept) no matter how much the customer’s WTP drops down a little in price. This method is a direct open ended question. The other method though is by giving an elicit agreement to pay a direct price, which is automatically set.
When you’re messing around with people’s willingness to pay, you need to know what you’re doing. If you have any business sense though, this isn’t actually that hard to accomplish, as you know the general price for an item, and you can usually charge a little bit more just for the price of convenience itself. While you may end up losing some potential business, there will generally still be people that will go ahead and have a higher willingness to pay and go for it anyway, therefore generating more revenue and money in your pocket. Don’t ever underestimate the ability to use someone’s WTP, and never go below your WTA (or don’t adjust it too low so you don’t get any profit whatsoever).