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The laws of economics apply to health care as they do to all other areas in which goods and services are sold. This includes the supply and demand laws, allowing you to calculate the optimal price for your products. In doing so, it is important to consider the specifics of your target audience and their willingness to pay (WTP) in your calculations. This article explains what this means and why this metric is important when developing economic models for healthcare https://digitalho.com/health-economic-modelling/.
What is a willingness to pay
Willingness to pay refers to the maximum price for a good or service a customer is willing to pay. Most often, WTP is represented as a number, less often as a price range. This is because different customers will have their own prices above which they will not be willing to pay for your products. In addition, it may vary with the same customer at different periods.
What affects WTP – the main factors
As we’ve already noted, the price threshold for the same product or service is not constant. What can affect consumers’ willingness to pay:
- The state of the country’s economy. Problems with the economy are always reflected in the ability to pay, reducing the WTP.
- Seasonality of the product (goods for holidays), fashion trends.
- The personal income level and price limits of the client. Creating a product or service, you should initially determine what category it will belong to – economy, standard or premium.
- Changing priority needs of the client. For example, with the appearance of children, the priorities of the couple noticeably change.
- The exclusivity or scarcity of the product. People are willing to pay more for unique or rare items.
- The quality of the product and its packaging. The higher they are, the higher the level of WTP.
Knowing these factors, the company can more effectively build a policy of pricing and marketing support for its products.
Methods of studying WTP
There are four methods of studying the buyer’s willingness to pay, each of which has its own advantages and disadvantages.
Market research and analysis
The higher the level of competition, the harder it is for manufacturers to keep prices high for similar quality products. Monitoring the market and studying the competitive environment will help determine the price range for your products.
It is also important to periodically evaluate your own previous sales experience for optimal pricing. To do this, company analysts prepare various types of reports based on archived sales data.
The advantage of this method is that it examines actual customer behaviour rather than anticipated customer behaviour. But the disadvantage is that it cannot be used for new to the market.
You can determine customers’ willingness to pay by observing their behaviour. This can be done in two ways.
A laboratory experiment on a focus group
You can create a simulated buying environment by distributing money to members of the group and offering them several options of similar products at different costs. By observing their behaviour, you can draw certain conclusions. Fast results are the main advantage of this method. But the group members know that they are participating in the experiment. In addition, the choice of subjects for the group may not be entirely correct. That is why it is difficult to consider such results to be absolutely correct.
Field experiments, i.e. observation of the behaviour of real clients
This can be done by adjusting the price of your product, and tracking how it affects sales. Another method of a field experiment is to conduct an auction.
Unlike the laboratory experiment, the field experiment allows you to find out customers’ real buying behaviour and willingness to pay. But its organization is more costly both financially and in terms of time.
Direct customer surveys through questionnaires.
You’ll get quick results by surveying customers, or a portion of them, about their willingness to pay for your product. However, it may not be very correct either, as it only reflects intent, which is not always the same as action.
Conducted by the same survey method, only in the survey do you provide customers with a list of similar products of different costs. Then, by asking consumers to do a ranking of the products offered, you get an answer to your question.
Indirect surveys are slightly more accurate than direct surveys, but they can’t be considered entirely reliable either.
Willingness to Pay and the Health Care Marketplace
For drug manufacturers, medical device manufacturers, and health care providers, the concept of willingness to pay means the same as it does for any other business:
- Reflection of market demand. The higher the willingness to pay, the higher the market demand for your product or service. It’s important for a company to monitor this metric because it lets you know which products to invest in and which can be removed from production.
- Pricing strategy. By changing the markup up or down, you can significantly change the sales volume of your product, which will affect profits. Tracking WTP allows you to understand in which direction to reprice for a better economic effect. It’s also an important metric to consider when setting the cost of a new product.
- Stimulating product development. Understanding which products or services your customers are in maximum demand for will help you make decisions about product or service development.
Calculating WTP and economic modelling for your business
Organizing and conducting research is only part of the job of studying customer willingness to pay. Processing the results is an important part of it. Today many consulting companies like https://digitalho.com/ offer effective digital solutions, which will make analytics of the received data quick and clear.
The most popular economic analysis methodologies are used to calculate WTP:
- Gabor-Granger pricing methodology.
- Van Westendorp method.
- Conjoint analysis.
- Setting implicit or explicit cost-effectiveness thresholds
In addition to calculating the willingness-to-pay price range for different markets, numerical models can help calculate the economic benefits of revaluation, optimal marketing costs, the economic value of your product to customers, and more.