What do you call the amount of interest to a given product that consumers are willing to buy at a given price and given period?

Few factors are more important in business than ensuring your products and services are appropriately priced. Charge too little, and you leave revenue on the table—money you could use to expand your team, refine your offerings, and grow your business. Charge too much, and you might alienate and send potential customers to your competitors.

Whether you’re a professional responsible for determining your company's pricing strategy or an entrepreneur on the verge of launching a new product or service, it’s vital to understand how much your customers are willing to pay. Below is an overview of the willingness to pay concept and strategies you can use to estimate this crucial metric.

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What Is Willingness to Pay?

Willingness to pay, sometimes abbreviated as WTP, is the maximum price a customer is willing to pay for a product or service. It’s typically represented by a dollar figure or, in some cases, a price range. While potential customers are likely willing to pay less than this threshold, it’s important to understand that, in most cases, they won’t pay a higher price.

“What the concept of ‘willingness to pay’ is telling us is that whatever your willingness to pay for a product might be, and wherever it comes from, you’re just not going to pay more than that [amount] for it,” says Harvard Business School Professor Bharat Anand in the online course Economics for Managers.

Willingness to pay can vary significantly from customer to customer. This variance is often caused by differences in the customer population, typically classified as either extrinsic or intrinsic.

Extrinsic differences are observable. They’re factors you can generally determine about a person without needing to ask them directly. A customer’s age, gender, income, education, and where they live can all be extrinsic differences that impact their willingness to pay.

Intrinsic differences, on the other hand, are a person's characteristics you wouldn’t know about without asking them directly. They’re hard to observe and often called “unobserved differences.” An individual’s risk tolerance, desire to fit in with others, and level of passion about a given subject are all examples of intrinsic differences that can impact their willingness to pay.

Other Factors Affecting a Customer’s Willingness to Pay

It’s important to note that your customers’ willingness to pay a certain price for your product or service isn’t static. In addition to extrinsic and intrinsic differences, numerous factors can cause a customer’s willingness to pay to rise or fall.

“We often wonder why people might be willing to pay for a product when another seemingly identical one was available for a cheaper price or free,” Anand says in Economics for Managers. “That shouldn't be surprising. Price isn’t the only feature that matters to customers. For example, legality, packaging, and brand name might matter as well.”

When a customer has an urgent need that your product or service can address, they may be willing to pay a higher price than when their need is less urgent. Similarly, an actual or perceived shortage in supply could make them more willing to pay a higher price than when there’s a surplus.

Conversely, a customer’s willingness to pay may fall due to the emergence of a new competitor with stronger brand recognition or the perception that your product or service is outdated. This is especially true in the tech space.

How to Determine Your Customers’ Willingness to Pay

By determining customers' willingness to pay, a company can set its prices at a level that allows it to maximize profits and customer satisfaction.

“You often see companies and managers immediately honing in on the question of ‘Where should we price?’” Anand says in Economics for Managers. “But it's often far more useful to start by thinking about customers' willingness to pay and how that's different for your product than for others.”

With this understanding, a business can work backward to determine the appropriate price that maximizes profits without alienating customers. Here are four methods you can use to estimate and calculate your customers’ willingness to pay for your products or services.

1. Surveys and Focus Groups

One of the surest ways of determining your customers’ willingness to pay is to ask them. While surveys tend to be more affordable than focus groups, both are an excellent way of doing so. Surveys typically collect a large amount of quantifiable data, while focus groups often result in more nuanced, qualitative information.

Relying on surveys and focus groups can come with challenges. If they’re not designed in a way that encourages respondents to answer truthfully, or if they rely on a poor sampling of consumers, they can result in erroneous data. This can have adverse effects on your ability to make business decisions.

2. Conjoint Analysis

Conjoint analysis is a specialized type of survey, in which respondents are asked to rank different bundled features. The responses are then used to assign a numerical value to each feature (called a “part-worth”) to determine consumers’ preferences.

The values can then be used to predict how a consumer will react to a given product and help determine which features make it into the end result.

3. Auctions

Auctions are often a more effective means of eliciting a consumer’s true willingness to pay because they tie the act of revealing one’s preference for a product or service to the probability of obtaining it. Although auctions can be useful tools for a seller with little to no information about consumers’ willingness to pay, they can result in uncertainty for consumers. This uncertainty and delay can cause some consumers to prefer fixed prices.

There are several auction types that can help reveal willingness to pay. Some of the most common include:

• Open outcry auction (English auction): In this type of auction, a pool of potential buyers submit increasing bids. The consumer with the highest willingness to pay wins the auction, most typically by bidding (and therefore paying) an amount just above what the consumer with the second-highest willingness to pay bids.
• Sealed second-price auction (Vickrey auction): In this type of auction, a pool of potential buyers submits sealed bids. The individual who submits the highest bid wins the auction but pays the second-highest bid. Bidders are motivated to bid their exact willingness to pay to maximize their chance of winning while minimizing the risk of overpaying.
• Sealed first-price auction: Bidding works the same way as in Vickrey auctions, but the highest bidder pays the price they bid (as opposed to the second-highest bid). In this type of auction, bidders are often motivated to bid below their exact willingness to pay so they can capture some value if they win.

4. Experiments and Revealed Preference

It’s increasingly possible to use data about consumers’ past choices to determine their true willingness to pay. This is known as revealed preference because the insight is based on what the consumer does instead of what they say. A challenge of this approach lies in the possibility that missing variables might confound the interpretation of data.

One solution to this challenge is to run experiments designed to determine consumers’ willingness to pay. For example, you might adjust prices to see how sales are impacted. By randomizing treatments and using control groups, you can avoid the problem of confounding variables.

The Importance of Getting It Right

Businesses have an incentive to determine consumers’ willingness to pay for their products or services. By estimating WTP and working backward to determine price, firms can confidently maximize profit margin while capturing as much value as possible from the consumer.

Of course, this is just one aspect of what it takes to manage a business properly. Other economic principles should be used in conjunction with willingness to pay to set prices and make other business decisions. While trial and error can be an effective means of learning these skills and principles, taking an economics course is a way of doing so much more quickly.

Are you interested in deepening your understanding of how to calculate your customers’ willingness to pay and use other key frameworks? Explore our eight-week course Economics for Managers and other strategy courses to learn more about how to develop effective pricing strategies. Download the free flowchart to find the best strategy course for you and your goals.

Excited about a new product idea but unsure if you're the only one who thinks it's a good idea?

Sometimes ecommerce entrepreneurs need more than a gut check to prove their business venture is viable. Whether it’s for your own reassurance or to build a strong case for a business funding application—or something else entirely—knowing the supply and demand in your niche is critical to informing your business plan.

Determining demand does more than confirm there’s an audience for your product: it informs pricing strategies, marketing initiatives, purchasing, and more.

What is market demand?

Market demand is how much consumers want a product for a given period of time. Market demand is determined by a few factors, including the number of people seeking your product, how much they’re willing to pay for it, and how much of your product is available to consumers, from both your company and from your competitors.

Total market demand can fluctuate over time—in most cases, it does. This could be due to a variety of factors, some seasonal and predictable, others more out of our control, like a natural disaster or even a pandemic. Sometimes the entire demand curve shifts.

When more people want a specific type of product, this is an increase in market demand and prices typically go up—more people want it and more people are willing to pay for it. But when market demand decreases, prices typically follow suit. It gets more complex than that, but we’ll get into it later.

One common business mistake is not considering market demand for your venture, especially when it comes to product development. You don’t want to invest too much capital in products that no one will buy—sitting stock eats at your profits and takes up warehouse space. You also want to account for economic growth as well.

On the flip side, you also want to make sure you always have enough to serve your customer base. Out-of-stocks are costly issues and could spoil your chance to snag a new lifelong customer

Excited about starting a business, but not sure where to start? This free, comprehensive guide will teach you how to find great, newly trending products with high sales potential.

What is the difference between individual and market demand?

As you might guess, individual demand refers to a single person or household, while market demand generalizes trends for many individuals in a particular segment. An individual who is passionate about dogs is more likely to pay more for a dog product than someone who has an average or minimal interest level. That individual’s preferences might not reflect the trends of your entire target market. General market demand is also often referred to as aggregate demand.

So why is this important? It’s important to understand that when you do your own market research to estimate demand, you need to survey many individuals—not just the individuals who have the most passion for your industry or product. If you forecast based on individual demand, you might have bad data and make yourself vulnerable to significant losses. Market demand is basically a bunch of individual demand data points put together.

It's critical to keep an eye on the demand curve over the course of the year so you can adjust your business strategy appropriately. When demand increases, this is often an opportunity to raise a given price of your products, but you don't want to raise prices so much that your customers jet to the competition.

What’s a market demand curve?

The market demand curve is a visualization of demand based on product pricing. Essentially, you map all of the individual demand inputs onto a line graph to create the market demand curve.

On the y-axis, you have the different price points. On the x-axis, you have the number of times the product has been purchased in a given time period at that price point. You’ll have several lines, one for each individual, that typically slope downward. This is because when a product is priced higher there's usually a shift in demand, as people are likely to buy less of it. On the flip side, the supply curve slopes upward. With any truly competitive market, there will always be ebbs and flows of supply and demand.

An example of using Google Trends to better understand aggregate demand of a given product.

How to find market demand

While 1:1 conversations with real people can provide a ton of valuable insights, there are ways to get additional data and make this process more valuable and streamlined.

There are two great places to “listen” to consumers: search engines and social media.

1. Use search engine optimization tools

Let’s consider our SEO tools. Keyword Surfer is a free Google Chrome add-on from Surfer SEO that lets you get insights from search engine result pages (SERPs) directly—no dashboard or login required.

It gives you search volume, keyword suggestions, and estimated organic traffic for all ranked pages. You can get a lay of the land before doubling down on a product idea inspired by search trends.

You can also find inspiration in Google Trends by typing in keywords, phrases, and topics to see how frequently users search these and related terms. You can filter by time period, country, and even city. It’ll also reveal where those searches are trending.

Much like the trending countries, the specific cities searching for our potential product give us insight into the distribution of interest and can give you insight into where you should focus your marketing efforts should you decide to move forward.

Check out Google’s “recently trending” page for emerging topics. Here, we can see there’s been some interest in phones. Ecommerce entrepreneurs might look at that as a way to drill down further into iPhone accessories specific to this model.

Now we’ll head over to Google Keyword Planner. (You’ll need to open a Google Ads account, but it’s free to do so. Creating an account now will ultimately be useful for when you launch your ecommerce business.)

Keyword Planner allows you to search for keywords to determine the average monthly search volume on Google for that term and related search terms. If we type in “iPhone accessories,” Keyword Planner gives us a whole list of similar keywords that can serve as inspiration for product ideas and validation for market demand. Fewer searches likely indicates less demand.

For your own market demand research, use the targeting settings to get data from your intended market. You want to make sure you’re targeting the countries you plan to sell to.

In your list of results, there are three things to pay attention to:

• Long-tail keywords. Long-tail keywords are keywords that are made up of three or more words. You’re not just looking for long-tail keywords, but long tails that are closely related to your product and niche. For example, “hdmi to lightning cable” comes up in our iPhone research.
• High search volume. This can be subjective. However, you want to look at long-tail keywords that have a decent search volume each month. Higher search volume means more people are looking for your potential product. This can start to give you a good understanding of how in-demand your product is.
• Competition. This column refers to how many other people are actively bidding for and competing to show up in queries related to that keyword. Low competition generally means that it would be easier to rank for these keywords and cheaper to purchase ads based on these keywords.

There is no minimum number of relevant searches per month we would recommend, but it’s important to recognize the current potential. It’s also relative to other product ideas and keywords.

Although Google sees its fair share of traffic and queries, it’s not the only place to learn about market demand. Enter social listening.

Read more: How to Do a Competitive Analysis (+ Free Template)

2. Use social listening tools

Social listening involves aggregating data from social media conversations about products, industries, brands, etc.

Many tools allow you to filter conversations, target specific geographic locations, and pull summarized analytics reports you can use in combination with other data. Each tool works differently but they all accomplish the same thing when it comes to researching market demand.

Essentially, you’ll enter a few keywords and the tool will pull social media posts that mention or are relevant to that keyword. You can see what the sentiment is, where people are talking about it, and even what they’re actually saying about it.

But market demand is about more than just calculating interest in a product. It’s also about understanding how much of a product your market will purchase and at what price point.

Look at public information about product sales—industry reports, case studies, etc. A good old-fashioned Google search is also a great starting point. We searched “how many people purchase iPhones?” and found this data from Statista:

If we were to go the iPhone accessories route, we could use this number as a starting point to estimate the potential market demand, and then drill down further into accessory data to get a better estimate.

Now we need to look at pricing. Find what your competitors are selling the same or similar products for. It’s a good idea to check out a range of competitors here, both direct-to-consumer brands and those that can be found on other online marketplaces. These are important data points to note.

Excited about starting a business, but not sure where to start? This free, comprehensive guide will teach you how to find great, newly trending products with high sales potential.

How do you calculate market demand for a product?

Ready to put all this information to work? Let’s crunch some numbers in a hypothetical example.

We’ll go back to the iPhone accessories idea—we want to sell “Billie Eilish iPhone cases,” which was another one of our long-tail keywords we found in Google’s Keyword Planner.

A quick look on Google Shopping shows that these phone cases go for anywhere from less than $1 to as much as $25 each These are important data points.

Now, we look at individual demand. How many Billie Eilish iPhone cases do people buy and at what price level?

Riley, our first customer, likes to switch out her phone case frequently—and she also breaks it a lot. She typically buys a new iPhone case every month—over the course of a year, six of those feature Billie Eilish. Our second customer, Sandra, makes her cases last longer, so she only buys two a year. Both of those are Billie Eilish.

However, as we adjust the given price, we also influence both Riley and Sandra’s behavior. As prices rise, both will likely purchase iPhone cases less frequently as consumer income is limited.

Here’s what that looks like for a full year:

When prices increase, Riley and Sandra buy fewer iPhone cases, impacting market demand.

Notice how as prices go up, demand goes down. That’s pretty much universal for all products and all markets (though there are always exceptions). To get an idea of total market demand, you’d repeat the above process for each customer.

Learn more: How to Start a Phone Case Business

Bringing it all together

It’s always great to be excited about your business idea. It’s equally important to logically and objectively analyze the viability of your product by determining whether there’s aggregate demand for it. When you understand market demand, it’s easier to accurately forecast so you don’t fall victim to purchasing too much or too little inventory. Happy researching!

1. Consumers must desire a product or service.
2. Consumers must be willing to purchase the product or service.
3. Consumers must have the resources to be able to buy the product or service.

While there are many factors that go into the demand of a product or service, there are a few things you as an online store owner can do to increase demand.

• Use marketing to generate awareness for your products.
• Educate your target audience on the value of your products or services.
• Use genuine scarcity to increase demand.
• Invest in product marketing and research.

The demand curve is a visual representation of the relationship between the price of a good or service and the amount of quantity demanded over time.