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Willingness to pay (WTP) and likelihood to buy (LTB) are two key numbers that can help you assess the total revenue opportunity of a product or service.
Pricing your products incorrectly can either exclude too many customers from your market if you price too high or leave money on the table from charging too little.
This article defines the terms and explains how they can be used in market sizing models.
Willingness to pay, often abbreviated as WTP, is the maximum price a customer is willing to pay for a product. While customers would likely pay less than this price (provided it isn't so low they question the quality), it's unlikely they will pay more.
Willingness to pay isn't a fixed number for all customers: you will likely see a wide variance in WTP between market verticals, business sizes, and geographical regions. It may be influenced by the buyer's role in the organization and how they perceive the problem the product or service is solving.
Companies can influence willingness to pay by positioning the problem, their solution, and their brand. In other words, WTP will likely vary between similar solutions in the same product category, which may not be captured by blind market surveys.
Willingness to pay data can be captured by market surveys or interviews that ask the four questions in the Van Westendorp’s Price Sensitivity Model, through conjoint analysis, auctions, or experiments.
Likelihood to buy, or propensity to buy, is a value that represents the likelihood a particular customer is to buy a given product or service. Likelihood to buy is a calculated number but there is little value in the number itself: it is, however, extremely helpful in comparing the relative intention of different market segments.
Likelihood to buy data can be calculated with something as simple as a survey question that asks, "On a scale of 1-7, how likely are you to purchase this product in the next 3-6 months?" A higher number is generally better than a lower number of course, but the real value is in comparing between segments: if one segment is a 6 and another is a 2 (and willingness to pay is also high), you know where to focus your go-to-market strategy.
Willingness to pay and likelihood to buy play a key role in market sizing and overall market strategy.
Pricing is a key element of market sizing, as the total addressable market is the number of customers with a problem multiplied by the price they are willing to pay to solve it. If a company already has product-market fit and good pricing data across segments, they can use their own pricing in their market sizing models. However, if the company doesn't have enough data, or is entering a new market segment, getting willingness to pay data into the market model can be useful in sizing the overall market opportunity.
Using likelihood to buy data in market sizing models is a bit less obvious, but can still be helpful. Likelihood to buy can influence the Serviceable (SAM) and Obtainable (SOM) market sizes if you add buyer intent as a qualifying metric. It's also helpful to identify the segments that are likely to have a lower cost of acquisition and faster sales cycle, as buyers are already wanting a solution.
Scalepath's free TAM template and market sizing software have areas to factor in willingness to pay and likelihood to buy data to help build a strong total addressable market understanding.