Willingness-to-Pay Calculation

Question

I read the cautions about the WTP calculation both on research paper and on forum, but I still wanted to ask if there is a source where I could read about how to calculate the WTP. I have included the price as an attribute to my survey and aimed to use it for WTP calculations, thus without the WTP, I am having difficulties to interpret the use of price as an attribute. I was planning to use the price to calculate WTP for segments that are developed based on the results. But I got sort of stuck with this, as I am using HB estimation and Ensemble analysis (CCEA). I couldn't figure out how to calculate it based on HB estimation and CCEA outputs.

Could you provide me any info about calculating WTP based on HB estimation and if possible for further segmentations.
I couldn't find any source that would help me to describe how to do that.  Any other suggestion to help me tackle this issue about the implementation of the price without using it to calculate for WTP would also be valuable.

I am using SSI Web built in HB estimation.

Thank you.

Answer 1

I think the most common (probably incorrect, perhaps, but still most common) way to estimate WTP involves using utility equalization to estimate how much money a given feature is worth.  For example, say we have two levels of price, $100 and $200 and that their utilities for some respondents Jones are -4 and +4, respectively.  Now we want to know WTP for a feature that may be absent or present.  It's utility is -1 when absent and +1 when present.  The range for this feature is 2, or one fourth the range for price (4 - - 4 = 8).  One could calculate the price equivalence for the feature as being a fourth of the distance between $100 and $200, or $25.  

As you've read, there are a lot of things wrong with this way of calculating a price equivalence and then believing that it really represents a WTP for the feature.  Still, if you can live with those, you could do this calculation, at the respondent level, and then use the results as inputs for your segmentation analysis.

Comments

In my calculation I only have a utility for the lowest price and the highest price (let's say +50 for $100 and -50 for $500). Are $100 and $200 also the lowest and the highest price possible in your example? (the product has several features determining the overall price)

What if my feature only costs 50$?
And what if my utility for not having it is -1 and for having it +1 like in your example?

How would I then calculate the WTP for this feature?

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Is it also possible to calculate the WTP from the average importances?

Answer 2

To follow-up on Keith's answer, if you want a simulation-based approach you can read about that in a paper we have at https://www.sawtoothsoftware.com/download/techpap/monetary.pdf.

If you want a more sophisticated and complicated approach that uses Game Theory, you can read a presentation from our 2013 Conference entitled "Using Conjoint Analysis to Determine the Market Value of Product Features."  You can find it on page 341 in the proceedings: https://www.sawtoothsoftware.com/download/techpap/2013Proceedings.pdf