Optimal introductory pricing for new financial services

Authored by Mohammad G Nejad, Sertan Kabadayi

Date Published: 2016

DOI: 10.1057/fsm.2015.25

Sponsors: No sponsors listed

Platforms: No platforms listed

Model Documentation: Other Narrative Flow charts Mathematical description

Model Code URLs: Model code not found

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.

Tags

diffusion Model information growth elasticity Sales Prices Issues Consumer durables Meta-analysis