- What is Introductory pricing?
- Example of Introductory pricing
- Advantages and disadvantages of Introductory pricing
- Setting a succesfull first price
So you have a new product (or maybe even a service) which should be presented to your customers. Moreover, it has to be done with profit for your business. Any specialist who is interested in how to make the right pricing decision during the very beginning of the product’s life cycle has, probably, faced these two terms as Introductory or Penetration pricing.
Introductory pricing is a pricing approach aimed to attract customers to a new product by offering a special price and creating a new customer audience for the new entry. It entails setting a reduced price at the beginning in order to increase market share and then, over some time, gradually raise the price to make the product or service profitable. What is the difference with Penetration pricing then?
In fact, these are synonymous terms with one small difference. The prefix “introductory” says that the first price will serve as one of the product's differentiators (so it is desirable to make it as attractive as possible), while the “penetration pricing” means that the product should try as many customers as possible in a short time due to the low and attractive price. One way or another, these two terms revolve around the same topic – how to price a product at its initial stage.
Introductory strategy is used in a number of circumstances, but the commonality is the goal of gaining market share where the price is used as a stimulus for people to adopt and purchase the product or service.
Interestingly, that introductory pricing works against the basic law of supply and demand, where the smaller the price the bigger the demand of goods. Introductory price starts low, and then rises with the hopes that the demand increases too. The idea is to try to expand market share and then gradually increase prices over time.
However, there is also an opposite approach called price skimming. It’s a pricing policy whereby business charges a high introductory price but then slowly reduces it to skim different segments of the market to maintain profitability over a period. That’s how it works:
The use of the introductory pricing strategy comes into a hand for certain situations and is suitable for almost all industries. Typically, this strategy is mostly used by discount retailers, manufacturers of mass goods, and businesses whose primary strategy focuses on a cost-based pricing approach. Also, starting with the trend of various online services, introductory pricing is used by almost all SaaS products and applications. Do you remember when you were offered a free trial, a cheap subscription for the first two months, or a free app with built-in monetization? These are all examples of intro pricing across electronic services. However, let's get back to retail.
The first thing the introductory pricing is used for, surprisingly, is self-promo and advertising. You can expect that the buyer will take something else in addition to your new product by attracting a buyer with a cheap product and impersonating yourself as the most inexpensive player in the market. Simply put, you can create unique pairs of complementary products.
As we mentioned above, the second reason for using this strategy is to reduce competitive pressure. At the same time, you will face the margin decrease, but after a market capture, you can raise the price and return the lost profit.
Finally, the most popular approach can be attributed to the introduction of a unique product. Intro strategy, in this case, is a crucial part of taking deep root for a product or a brand in the market. For example, when you offer customers your own new private label's product.
Among the gains you can get from the introductory pricing we can highlight the following:
A favorable price perception by the buyer.
High customer retention rate (before the price increase).
A new product with an attractive price is an excellent base for a successful promotion.
If we talk about a new market, you take the lead among competitors. Therefore, you will dictate your rules.
At the same time, the strategy of introductory pricing is not a panacea and carries some risks. For example:
Your consumers might be disappointed when they'll see the price increasing for a cheap product.
In search of a better offer, some buyers can be described as grasshoppers who switch from one offer to another.
Your target audience can be extremely narrow, which means that you don't have to work at a loss to meet its needs.
Last but not least: let’s consider some tips and tricks on how to maximize your efforts with introductory pricing and minimize all the risks described above.
Know the pricing thresholds
Although this topic is related more to the later life cycle of the product, it is inextricably linked to the first price, because sooner or later the business will need to increase it. To keep the customer satisfied with prices as well as make price increases smoother, retailers often resort to using price thresholds. On simple, psychological slides, which indicate the desire of the buyer to pay this or that price for the goods.
The easiest way to know your pricing thresholds is to ask your audience directly and apply the results to the appropriate chart. For example, you can utilize the Price Sensitivity Meter based on a concept of what price most people regard as being reasonable.
Don't single out the pricing strategy
Pricing is certainly one of the factors of future success, but do not forget about other dimensions of traditional marketing mix of 4P and your CX. The better interaction experience (or customer-experience) between the consumer and brand it is, the higher the price can be. It's nothing new and can be implemented even for the totally new products on the market.
Be smart – use technologies
And finally, don't be afraid to use technology. In terms of the simplest things, you can find similar offers on the market almost for each product. You can find them with the help of competitors' data scraping and set the first price on the basis of data. This is a basic approach which is successfully used by companies around the world.
However, at Competera we offer a more advanced solution. To recommend the first price we use an AI algorithm that is able to compare all product’s credentials, correlate them with your assortment, find the similar product intersection, and compare prices, elasticity, and other factors. Based on this data, it offers the first price to the Competera’s user. Thus, your new product will avoid any price blockers preventing profit or revenue losses.
Introductory strategy is used in different situations, but the commonality is the goal of gaining market share where the price is used as a stimulus for people to adopt and purchase the product or service.
When the demand curve shows that people have already get used to buying the new product, an introductory price could be changed.