Low Start Pricing

Description

When you are charging for a service or loan that will require customer payments over a period of time, offer this at a lower price for a limited initial period.

If this is a high-value item that cannot be recovered, or where it will be worth less if recovered, it is a good idea to make sure that customer will be able to pay in the longer term as well as the shorter term. If necessary, the amount may be secured against a higher-value item.

Example

An internet provider offers reduced price connection for the first 12 months. After that, it is full-price.

A bank offers a five-year reduced cost mortgage to young professionals who want to buy a new house and whose prospects for increased salaries in the near term are good. The reduction in cost in this period is paid for by slight increase in cost over the rest of the life of the mortgage.

Discussion

Low-start pricing is typically used for one of two purposes. As a marketing method, it is an inducement to buy. Even if the overall cost will be higher than a non-low start, this can be attractive as people make many decisions based on a short-term perspective. As long as the full-price period seems far enough away, the low-start offer will be attractive. For many, one year is sufficient.

The second purpose is based on the assumption that customers are unable to pay a higher rate at the moment, but will be able to pay this in the future. This is particularly valid when customers will have a greater income in the future, for example because of promotion or because inflation will lead to a general salary rise.

There may be a temptation for customers to take advantage of the low start pricing and then switch to another provider at the end of the cheap period. This may be dissuaded by several methods, such as:

Including a commitment for the longer-term in the contract.

Including a claw-back or some other penalty for pulling out early.

Making it difficult to pull out, such as with multiple forms to sign and hard-to-contact support people.

Providing such a great service that the customer appreciates the value of the product.

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Low Start Pricing

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