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Optimal introductory pricing for new financial services

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Abstract

Financial services institutions often provide special introductory prices to new customers who sign up for their services such as credit cards, credit monitoring services and online stock trading. Despite their prevalence, the decision to provide introductory prices to new customers entails challenges for decision makers. Providing small incentives may not perceptibly affect the adoption of the service while providing a large incentive leads to the loss of revenue and profits. As a result, the effectiveness of such activities on firm profitability remains largely unexplored. This study seeks to address this gap in the literature by exploring optimal introductory pricing of a financial service. Employing agent-based simulation experiments, we find that offering introductory discounts significantly increases a firm’s net present value (NPV) of profits. Moreover, the findings suggest the amount of discount and the duration of time that a new customer receives the discount are critical factors in determining the NPV of profits. The research and managerial implications are discussed.

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Acknowledgements

The authors thank Hooman Estelami for his comments on early drafts of this article.

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Authors and Affiliations

  1. Gabelli School of Business, Fordham University, 113 West 60th Street, New York, 10023, NY, USA

    Mohammad G Nejad

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  1. Mohammad G Nejad
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  2. Sertan Kabadayi
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Correspondence to Mohammad G Nejad.

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Nejad, M., Kabadayi, S. Optimal introductory pricing for new financial services. J Financ Serv Mark 21, 34–50 (2016). https://doi.org/10.1057/fsm.2015.25

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