Switching from an existing brand to a new one, or trying a completely new product, is a risk for consumers. Best case — they like the new product and decide to stick with it; worst case — they regret the purchase and never return (while telling their network about the negative experience). Companies can mitigate this risk for potential consumers using an introductory pricing strategy.
Let’s look at how introductory pricing strategies work, the advantages and disadvantages of this pricing model, and how to implement it.
What is introductory pricing?
Businesses use an introductory price at the beginning of a product’s life cycle to entice potential customers to try the new product or service at lower prices. The result is increased sales and faster market share gains. The appealing price points make early adopters feel they have little to lose by purchasing. Over time, companies progressively increase prices to ensure they are profitable while working to retain customers and reduce churn.
How does introductory pricing work?
Introductory pricing works as a psychological pricing model; it appeals to buyers’ desire for a good deal. For example, if you’ve been using the same laundry detergent for years, you may only be enticed to try a new product if it offers similar or better benefits and costs less.
Once you have tried and are happy with the new product, the company hopes you will become a loyal repeat customer, even at a higher price. This pricing model requires businesses to sacrifice profits in the short-term, in return for increased market share and sales volume. The long-term goal is maintaining this market share and customer loyalty as prices progressively increase.
What is the difference between introductory pricing and penetration pricing?
Penetration pricing and introductory pricing are similar, but there is one key difference. The clue is in the word “introductory.” An introductory pricing strategy uses lower price points while the product or service is introduced to the market. On the other hand, penetration pricing uses incentivized prices to maximize customer uptake over a short period.
How is it different from price skimming?
Companies like Apple use price skimming strategies to launch a new product at a high introductory price. Early adopters usually tolerate this price to be the first to own the product. Over time, prices are gradually lowered to “skim” more market segments.
What is an introductory pricing structure?
Tiered pricing is one type of introductory pricing structure. SaaS companies, like accounting software and email marketing providers, often use tiered pricing as part of their introductory pricing strategy.
Companies know prospective buyers are unlikely to pay for a new tool without trialing it. Tiered pricing offers consumers several entry points to the service, starting with an introductory price. In some cases, this is a free version of the software with minimal features and support. Once customers have used the tool and recognized its value, the company encourages them to upgrade to paid premium memberships.
Examples of introductory pricing strategies
SaaS: Klaviyo
Email marketing provider Klaviyo uses introductory pricing to encourage prospective customers to try the service. In this tiered pricing structure, the “free” option gives customers a risk-free way to trial the software and understand all its features and uses. Once their email subscriber list begins to build, they are moved onto paid plans, which is where the company makes its money.
Streaming: Netflix
Netflix is an excellent example of introductory pricing. Following its streaming launch in 2007, a limited subscription cost customers around $5 per month. Since then, most major markets have experienced at least five price increases between 2016-2022. Netflix’s strategy was to gain as many subscribers as possible as quickly as possible. They had to make a huge investment in content creation to keep those customers through several price hikes and with more competitive pressure.
Credit cards
Credit card companies are notorious for using introductory pricing strategies. When comparing credit cards, you’ll notice offers like zero percent interest for 24 months or a lower interest rate for a set period. These introductory incentives are only available to new customers. Once they become existing customers, they will eventually move them onto the regular interest rate. Credit card companies rely on customers continuing to make purchases and paying interest long after the introductory offer has ended.
Who should use it?
Introductory pricing strategies can be used in most industries, from brick-and-mortar retail to manufacturing, e-commerce, and services. You are just as likely to see a new clothing brand launch with an initial sale as you are to see a beautician offering discounted prices on a new procedure.
Introductory pricing is usually most effective in the following circumstances.
- A company is launching a new product or service into an existing market and wants to get a foothold by taking market share.
- A company is launching a completely new product or service into a new market and wants to establish itself as the leader before competitors enter.
What are the advantages?
There’s a reason why introductory pricing strategies are so commonly and widely used. Let’s look at some of the advantages of this pricing model.
Gain sales and market share
The main advantage of an introductory pricing strategy is the ability to swoop in and take market share from competitors. When a product or service enters a market for the first time, potential customers are more likely to purchase at a palatable price. Introductory pricing allows businesses to attract customers quickly and establish themselves as a credible market player.
Positive customer sentiment
A survey by RetailMeNot found that 80 percent of respondents felt encouraged to make a first-time purchase with a new brand if they found an offer or discount. It’s no secret that people like to get a good deal — especially if they love the product or service. Introductory pricing is a great way to entice customers to try a new offering for less while betting on them feeling positive about the experience and telling others.
High customer retention
One catch to this is retention usually remains high while prices remain low. Customers stick around while getting a good deal, but companies must deliver real value if they want customers to stay loyal when prices increase.
What are the disadvantages of introductory pricing?
Introductory pricing strategies can be an effective way to enter a market and win over a significant cohort of customers, but it’s not a silver bullet. Here are some of the drawbacks.
Requires significant marketing investment
Potential customers can only take advantage of an introductory price if they know about it. For introductory pricing to succeed, businesses must invest in marketing to spread the word and encourage adoption.
Slim initial profit margins
Companies must prepare to take a hit on profit margins if they intend to use an introductory pricing strategy. Some may even be unprofitable for a period of time until the product or service has sufficient uptake. Businesses must have the financial resources and long-term visibility to sustain the introductory period.
Customer churn
What happens when you increase prices and customers no longer feel your product or service offers good value? The answer is churn. It can be an unprofitable cycle for companies that continuously spend on marketing to attract new customers with introductory prices, only to lose them when prices increase.
Businesses must take a long-term view of their pricing strategy. They should understand how much and how often customers will tolerate a price increase, their competitors’ prices, and what unique value their offering brings to the market.
How to create a winning pricing strategy
Offering lower prices is one way to generate sales, but companies must operate within the bounds of profitability and margin KPIs. Setting pricing thresholds helps companies avoid engaging in unprofitable price wars. Intelligent pricing software like Flintfox’s Performance Pricing Engine allows you to plan and track a profitable introductory pricing strategy that aligns with the market, at the same time giving you the ability to execute your pricing strategy with speed and precision.
Find out how Flintfox can find the magic in your margins today.
