WTP: willingness to pay

Definition

Willingness to pay (WTP) is an economic concept: the most money a consumer is prepared to spend to buy a product or service.
WTP reflects the subjective value a person places on a product or service, given the benefits it brings and their financial situation.
It is used to analyze market demand, set the right prices, assess public policies and put a value on goods that are not traded, such as the environment and health. It can be measured in several ways, including surveys, choice experiments and the analysis of market prices.

Some examples

Here are a few simple examples of willingness to pay in different settings:

1. Movies: someone might be willing to pay at most €12 for a ticket to a long-awaited film, while for a less interesting one their willingness to pay might drop to €6.
2. Mobile phone plans: a customer might have a WTP of €30 a month for a plan with unlimited calls and texts and 10 GB of data. If the plan offered 50 GB, their willingness to pay might rise to €40 a month.
3. Public transportation: a commuter might be willing to pay €60 for a monthly pass, but if it also gave access to a bike-sharing network, their WTP might rise to €80 a month.
4. Environmental goods: the residents of a city might be willing to pay an annual fee of €50 to protect a nearby nature reserve, helping fund its conservation and upkeep.
5. Organic produce: a consumer might be willing to pay more for organic fruit and vegetables than for conventional ones, because they place a higher value on their sustainability and quality.
6. Coffee: a person might be willing to pay more for an espresso in a beautiful square of an Italian art city than for the same coffee at a café on the outskirts. Some people might also pay more for their first coffee of the day than for the others they drink later.

In each example, deliberately simple and taken from everyday life, willingness to pay can vary widely from person to person, depending on their preferences, how they perceive value and their financial situation.

See also: WTS: willingness to sell, Value stick, Willingness to pay and willingness to sell.