Estimating Customers Willingness to Pay



Recently we had telecom customer who was looking for some help on understanding and estimating customers willingness to pay (WTP).


Unfortunately the WTP is fairly complex however we will try to explain how you would calculate the WTP values and from there hopefully you can find some segment based use for it.


WTP is an expression used to determine the market and customer demand curve fundamentally.

Let’s say for example we have the following 3 customers: A, B & C. Based on the interview or information gathered, the customer say they would be willing to pay the following:

A would pay $5 for product, customer B would pay $7 and customer C would pay $10.


To work out the demand curve – we ask each of them an additional question – if you were to but 2 of the products what would you be willing to pay, if you buy 3 how much, if 4 how much etc…

So for example, customer A may say $4 for 2 customer B sais $6 for 2 and customer C says $8 for 2 items.

In this case for every additional unit of purchase A & B will pay $1 less and C will pay $2 less.

If we put this into a table we have.


Units A B C
1 $5 $7 $10
2 $4 $6 $8
3 $3 $5 $6
4 $2 $4 $4
5 $1 $3 $2


As a next step we need to combine this into total demand at each price point.

Assuming we start with $11 which may have been our ideal desired price we would have no demand at that level.

On the lower price levels we would have the following:


Price Demand
$11 0
$10 1
$9 1
$8 2
$7 3
$6 5
$5 7
$4 10
$3 12
$2 14
$1 15


One we have done this – we have total market demand as well as visibility of how many customers are present at which price level & category.


In order to use this with marketing segments you would need to know how many and who are each of the customers in terms of their responses to these questions ie. count the customers at each price category and determine which price sensitivity category they would fit into.

From there you would be able to define your segments as well get a feeling of each segment size.

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