A very common marketing tactic is to charge less to new customers in order to attract them to start using the company's service or products. For example, storage facilities rely on this to get customer’s business when they offer to rent space for the first month for $1. This works in this industry because it is a lot easier to move things into storage then to actually move accumulated items out! But introductory offers are not always effective in increasing revenue and sometimes they can actually hurt the sales of the company.
Decide on whether to use this strategy by asking these three questions:
1. Is this a “one and done” or a subscription sale?
It is not effective to offer a lower price to new customers if they will only buy your product or service once or on an annually basis. This typically only leads to less revenue and profit because all that is being offered is a discounted rate. If this is the buy cycle for your company, then sell at the highest possible price that the value that is being offered will allow. However, if you sell a monthly service or a product purchased by subscription where the customer buys at least four times a year, it can be effective since the focus for the company should be on the customer’s life time value (LTV) over multiple years and not just the initial sale. Many businesses offer this discounted rate for the “initial term” which is typically one month to one year.
2. Is there a high barrier to exit for the customer?
If it is expensive, time consuming or just plain difficult for the customer to switch to a new vendor, then this is the best time to use a low introductory price to get them started. For example, this is consistently used by cable vendors where the “hassle factor” in switching is high since it involves on site visits and getting all the devices to actually work with a new service. These companies penetrate the market by “hooking” the customer with an initial low introductory price and then use these market barriers to prevent them from leaving when their service ratchets up to its normal fee
3. Will it get existing customers angry?
A lot of customers get mad when they see a lower cost advertised to new customers than the rate they currently buy. They reason that since they are long time loyal customers, shouldn’t they be the ones to get actually get a lower price? The best way for a company reply to this angry customer is to offer them loyalty incentives for their continued business. Many companies use “frequent buyer” programs to accomplish this exact goal by offering buying credits after a certain number of purchases. This shows the financial benefit of loyalty and doesn’t make the existing customer feel they are not getting an incentive like new customers.
Has your business successfully used introductory pricing? What were the results?
Barry Moltz helps small businesses get unstuck. He applies simple, strategic steps to facilitate change.
Barry has founded and run small businesses with a great deal of success and failure for more than 20 years. He is a small business speaker, radio host and author of four books. As a member of the Entrepreneurship Hall of Fame, he has spoken to audiences of up to 20,000 people. He is a regular guest on business radio and cable TV programming.