3/27/2020 How Much Will People Pay for That?

MAGAZINE FALL 2001 • RESEARCH HIGHLIGHT

How Much Will People Pay for That?

Mary Kwak • October 15, 2001 READING TIME: 2 MIN

A new twist on a decades-old analytic technique promises to give marketers a better

tool for measuring their customers' willingness to pay (WTP), outperforming
common survey-based methods. That's according to a forthcoming Marketing
Science Institute working paper by Klaus Wertenbroch and Bernd Skiera, who
introduce the procedure and explain how they tested it.

To use the process, researchers rst ask consumers at the point of sale to state the
most they would pay for a particular product. Then the product's price is set at
random — for example, by having someone draw a ticket marked with a price.
Participants who o ered more than the amount drawn have to use their own money
to purchase the product at the randomly determined price. Individuals who o er less
have no chance to buy. The authors label the new approach BDM, after social
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scientists Gordon Becker, Morris DeGroot and Jacob Marschak, who invented a
similar method in the 1960s to evaluate attitudes toward risk.

In three studies involving inexpensive consumer goods (a soft drink, a slice of cake, a
ballpoint pen), Wertenbroch and Skiera found that BDM displayed signi cant
advantages over price matching (asking consumers to state their WTP) and a
choice-bracketing technique (asking consumers to make a series of hypothetical
buy/don't-buy decisions across a narrowing range of price points).

When asked directly for their WTP, participants' answers tended to collect around
major price points, whereas BDM generated a smoother and presumably more
accurate distribution. The BDM distribution also was more stable across di erent
subsamples and showed a stronger correlation with factors that might drive
purchasing decisions, such as how thirsty or hungry individuals felt.

Most striking, the BDM estimates of mean WTP were 21% to 59% lower than those
produced by alternative methods. “If you simply ask people how much they're willing
to pay, they don't think hard enough about the problem,” Wertenbroch explains. “But
if you force consumers to put their money where their mouth is, they tend to be
more conservative.”

More broadly, says Wertenbroch, BDM mimics the actual decision-making process,
and it is relatively simple to implement at real points of purchase, giving it an
advantage over lab-based simulations.

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Like all market-research methods, BDM is vulnerable to strategic misrepresentation,

albeit to a lesser extent. For example, participants may understate their WTP in the
hope of in uencing future prices. In addition, BDM may be more di cult to
implement with big-ticket items, and it can be applied only to existing products or
prototypes. But the test results suggest that BDM may be a valuable option for
marketers, used either alone or in combination with familiar transactions — or
survey-based techniques.

Wertenbroch, an associate professor of marketing at INSEAD in Fontainebleau,

France, and Bernd Skiera, professor of electronic commerce at Johann Wolfgang von
Goethe-Universität in Frankfurt, Germany, call their BDM working paper “Measuring
Consumer Willingness To Pay at the Point of Purchase.”

Topics

Marketing Pricing & Promotion

TAGS: Customer Psychology, Pricing, Product Marketing

REPRINT #: 43199

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