Do introductory discounts work? The research says yes

Faculty | May 11, 2016 | Gabelli School of Business

From left, Associate Professor Sertan Kabadayi and Assistant Professor Mohammad Nejad combined on research into introductory pricing by financial services companies.

Nearly everyone has been offered an introductory incentive to open a financial services account of some kind.

The ubiquity of those offers led Mohammad Nejad and Sertan Kabadayi, two Gabelli School of Business marketing professors, to ask the questions: Do introductory discounts work? And, if so, which of those offers work best?

Yes, they work, Nejad and Kabadayi found, and the bigger the discount, the better the return. Moreover, the professors’ research showed that timing matters as well.

“Overall, offering a greater discount for a shorter period of time leads to higher overall [net present value of profits] than other strategies including offering smaller discounts for a longer period of time,” Nejad and Kabadayi write.

Their research – Optimal Introductory Pricing for New Financial Services, published in the Journal of Financial Services Marketing – is generating interest in the marketing and financial services communities.

“We’re getting emails very often since it became available,” Kabadayi said. “It is one of the top papers to be downloaded from this specific publisher, so it shows that there is some interest for this topic in general and for this paper more particularly.”

Kabadayi, the Gabelli School’s marketing area chair, said the topic falls within Nejad’s specific research interests and that the two became interested after general conversations they had about the issue.

Kabadayi said Nejad used “agent-based modeling,” a quantitative modeling approach to research in which a number of different introductory pricing scenarios were compared in several combinations of market-condition parameters.

“Honestly, the results were not that off-the-charts surprising, but then it shows us that so many financial institutions are doing stuff without knowing what they do … more like trial and error,” Kabadayi said. “In this paper we showed they need to follow a specific type of optimal level to maximize their profits.”

That model, larger discounts for a shorter period of time, will help financial-services firms that do introductory pricing to reduce the guesswork in their offers.

Kabadayi said the paper fits in with the marketing area’s growing expertise in financial-services marketing.