By Alicia Kellebrew
NFCC Certified Financial Professional
The Village Financial Resource Center
Have you ever noticed that no matter what your college degree is in, what your professional is, or what industry you work within, that each comes with its own set of special “lingo” or “jargon?” For me, my degree is in Banking and Financial Economics and my industry is consumer credit counseling and education. This means I am full of fun acronyms like APR, HELOC, PITI, DMP, ARM, etc. But by far my favorite one has always been WTP or “willingness to pay.” And no, not because I probably heard that phrase about a million times while in college but because it plays a vital role in my day to day life.
Thoughtfully setting your own “willingness to pay” can help you identify financial priorities and stick to them. And, in the long run, that translates into meeting your financial goals.
WTP is defined as “the price or dollar amount that someone is willing to give up or pay to acquire a good or service.” So if you think about it, we deal with WTP over and over again each and every day. “You want how much for THAT?!?!” “I am NOT paying full price for that. I will wait until it goes on sale!” “I would rather spend my $50 on this rather than that!” All those statements are about WTP
Fortunately for me (and maybe unfortunately for the businesses where I shop!), my willingness to pay is usually pretty low. I determine what the maximum amount I want to pay for something is, and, if I can’t get it for that price, I walk away and wait for another day when the price is more to my liking. That means I’m in control of how much I spent — not someone else.
There are three keys to making this work. First, you have to know how much you value the item in question. Second, you have to know what the absolute maximum amount you are willing/able to spend. And, third, you have to be able to stick to your limit. Let’s look at each key in more detail.
- How much do you value the item, good, or service?For each of us, there are things we value more than other things. For example, imagine your favorite musician/band is coming to town. If they are coming to play a show and they don’t usually do that, you may be willing to pay more for that than you would to see a band that you don’t know or don’t really like. So what you would be willing to pay in the former case would be relatively high.
- What is the maximum amount you are willing to pay for the item, good, or service?You have to know what your limit is so that you can be a “price maker” instead of a “price taker.” What does that mean? You work to do all you can to get the price where you want it — use coupons, wait for sales, ask for discounts, etc. — rather than just take the price as it is. A good method for keeping this in perspective is to sit down and calculate how many hours you have to work in order to pay for something. I have done this many times and determined that the cost of a particular item wasn’t worth that much of my hard work!
- You have to be able to stick to your limit which requires determination, discipline, and patience.Sometimes this means waiting to purchase until the price is right. I have found quite often that if you show that you are willing to walk away, the price or terms have a tendency to become a little more favorable pretty quickly as they would rather lose out on a few dollars than the entire sale. And sometimes you find the terms don’t become more to your liking but that the value you thought that item, good, or service had isn’t as high to you as you initially thought.
Bottom line: Knowing and sticking to what you are willing to pay requires a little reflection and insight into what you value as well as the ability to delay gratification. But in the end you may surprise yourself at how good you get at it over time and how beneficial it can be in the long run.