(2023-05-21) Cohen When Customers Are Willing To Pay

Jason Cohen: When customers are "willing" to pay. This fresh take on “Willingness-to-Pay” analyzes three types of customer motivation, leading to superior strategies for growth that also better the world.

Traditional economics: WTP and Consumer Surplus

I’ve come to believe that analyzing “WTP” is not only non-trivial, but also leads to very different strategies, business models, and outcomes.

“Willingness” to pay

I’m irked by this word “willingness.”

In 2015, Martin Shkreli, then-CEO of Turing Pharmaceuticals, bought the rights to the drug Daraprim

He raised the price of a pill from $13 to $750

Patients have no choice: It’s pay or die. The economist would say, patients objectively have a high “willingness” to pay. But is this how we should define “willing?”

it’s more instructive to point out mundane, non-life-threatening examples of why “willing” is not the right word.

It happens with commodities, which economists say are a “perfect market.”

It happens with bundling

they bundle channels specifically because they know consumers are not “willing” to pay for all of them

Because the content-owners have a near-monopoly, consumers have no choice.

There’s also “willing” versus “able.” Perhaps many more consumers would be “willing” to pay $1000 for a fully tricked-out smartphone, but most are not “able.”

But it’s not all bogus. There is a genuine concept of being “willing” to pay more, and thus genuine “Customer Surplus.”

I am willing to pay more for Anker products

People pay more for TOMS2 and Patagonia3 products because of the authentic missions of the companies

Indeed, genuine “willingness” creates the best, most durable, most profitable businesses. Consumers not only pay more, they’re happy to pay more, creating profit margin. They become evangelists, driving efficient growth. The company is resilient to competition, because consumers are buying for reasons other than “features” and “price.”

Analyzing the differences between these kinds of WTP yields insights that all products and companies can leverage to build the best strategies.

Three kinds WTP

Love

• Result: Allyship

Utility

• Result: Fair exchange of value.

Coercion

• Result: Adversarial

All of these things contribute equally to the economist’s definition of WTP: The customer is in fact paying, and might pay more if you raise prices. But strategically they are completely different.

Effect on growth and competitive pressure

Love creates inexpensive, non-linear growth, because your customers are your allies.

You get repeat purchases

You get word-of-mouth advocacy

When a new competitor arrives, even when it is superior in features or price, your customers will stay, because they’re here for more than just the features and the price.

Utility helps grow existing customers, and is neutral-to-positive on attracting new ones.

Coercion causes your customers to be allied with competitors; they’re internally-motived to leave, so they will.

Profit done right: Create more positive WTP, then split it with the customer

Creating value for the customer comes first.

The strongest organizations have all three. For example, Apple

Even the cold-blooded capitalist should eschew Coercion

Appendix: Relationship to other frameworks

Kano: “Love” feels a lot like Kano’s “Delight”—a joyous, perhaps even unexpected upside. “Utility” maps to “Performance”—where the more of it there is, the more value it is to the customer. “Coercive” maps to “Inverse”

Moats: Many of these things sound like moats, and for good reason: Increasing WTP of any type increases your ability to capture and retain customers

Start with “Why”: “Love” reinforces the Simon Sinek’s admonition that companies must “Start with Why,” i.e. understand and articulate its higher purpose, it’s mission, because when that’s strong and important

Quality Engagement Metrics: Many products wish to “drive engagement.”