When should you lower prices?
At a glance:
Entry tiers and loss leaders are the price people see on the sign, in the ad, or at the top of the pricing page – and they set expectations for everything else you sell.
WHAT IT IS
Entry tiers are stripped back versions of your core offer – fewer features, less flexibility, or tighter terms – priced lower enough to reduce friction for first-time or price-sensitive buyers. Loss leaders are different: deliberately under-priced (sometimes below cost) offers used to drive demand for higher-margin products, services, or membership.
WHY IT MATTERS
Penetration and entry pricing can accelerate trial and share gains when you’re unknown or fighting incumbents .
A clear “from” price anchors your value story and signals where you sit in the market.
Heavy promotions and loss leaders can shift customers’ internal reference prices down and raise future price sensitivity if overused.
Entry tiers are a low-stakes way to test new bundles, channels, or segments before rolling changes into flagship pricing.
CASE FILE
Basic Economy = Lower Price, Clear Trade-Offs
"As a competitive tool, it's done exactly what we wanted it to do."
– United Chief Commercial Officer Andrew Nocella on basic economy
Setup. Legacy airlines continue to battle ultra-low-cost carrier (ULCC) price pressure. They needed to attract highly price-sensitive segments (i.e., “just get me there” flyers) without cannibalizing higher-fare cabins.
Move. Several airlines rolled out their variations of Basic Economy seating: a lower entry price with explicit trade-offs (seat selection, change flexibility, boarding priority, variations by airline, etc.).
Outcome. Big airlines have captured the “just get me there” job-to-be-done while preserving upsell to higher fare products (Economy/Main Cabin, Economy Plus, etc.). By having customers self-segment at checkout, they defend yield and reduce “race-to-the-bottom” pressure.
Lessons.
Understand your loss leaders and entry tiers. For the airlines, creating a clearly bounded entry tier with restrictions kept the “discount” architectural, not just an across-the-board price cut.
Focus on the “job-to-be-done” approach. For the airlines, that means designing Basic Economy for the traveler whose job is to arrive cheaply on fixed plans. Then, they leave out flexibility or extras the customer won’t pay for, leaving those as paid upgrades.
Guard margin and avoid a race-to-the-bottom. For the airlines, that means keeping full-feature economy as the reference point and making trade-offs crystal clear. The entry tier was designed to pull shares from ULCCs without resetting headline fares.
Framework:
-
Penetration pricing sets a low initial price to win share and build a customer base, then raises prices or moves customers up the ladder once they’re embedded. It’s usually above cost but below long-run steady state prices. Loss leaders go further: specific items are priced at or below cost to attract traffic or seed an ecosystem. Entry tiers sit in between – a permanently available starter option with thinner margins and constrained scope.
Takeaway: Getting clear on which type of pricing you’re running (and for how long) keeps you from drifting into accidental permanent discounting.
-
Low entry pricing is a CAC bet. You’re trading early margin for trial on the assumption that retention, cross-sell, or upsell will more than repay the discount. Retention improvements are far more powerful profit drivers than raw acquisition – a 5% retention lift could raise profits anywhere from 25%-95% (a big window, granted). That only happens if entry-tier cohorts actually renew and move up.
Takeaway: If payback on entry customers is worse than on standard customers, you’re just doing lower-margin business.
-
Retail and platform examples work because the unit that loses money is structurally tied to higher-margin behavior: warehouse traffic and basket size at Costco, or games and subscriptions on consoles. If your loss leader doesn’t have a clear, measurable path to profitable add-ons, you’ve just cut price.
Takeaway: Before you label anything a loss leader, make sure you know what they buy next, at what margin, how often, and over what horizon.
-
Repeated price promotions shift consumers’ internal reference prices downward and increase price sensitivity over time. Customers exposed to frequent discounts adjust their belief about the “normal” price and become more deal-driven. That’s fine for a single entry SKU, carefully fenced and time-boxed, but dangerous if half your catalog cycles through intro deals.
Takeaway: The more your customers wait for a sale, the weaker your everyday pricing power becomes.
-
When we look at “everyday low pricing” (EDLP) vs. high-low (promo-heavy) strategies, cutting everyday prices by ~10% only increases sales ~3%, and reduces category profits by ~18%, while high-low strategies with periodic promotions can raise profits by ~15%. The message for smaller operators: don’t quietly turn everything into a low-margin entry tier.
Takeaway: Use a few visible doorbusters or intro offers as intentional signals, keep the rest of the line at full, fair margin, and avoid a promotion treadmill you can’t afford.
-
A good entry tier does three things:
Lowers perceived risk for first-time buyers
Preserves your quality and positioning
Makes the step up to the core offer feel natural and justified
That usually means constraining scope (features, speed, access, flexibility) rather than quietly discounting the exact same thing.
Takeaway: Entry tiers that truly reflect lower serve cost are more sustainable than ones that just give away margin.
-
Who receives a discount and how often they see it matter for long-run sensitivity. In practice, that means fencing entry and intro deals to new customers only, specific channels, specific time windows, or tightly scoped SKUs. Internally, treat entry-tier customers as a separate cohort with their own CAC, gross margin, attach rate, and churn metrics.
Takeaway: If lifetime gross profit doesn’t beat your acquisition cost by a healthy margin, tighten the fences or raise the entry price.
-
Intro offers and loss leaders should have explicit exit conditions – inventory target, penetration threshold, or time limit. Because customers’ reference prices are sticky, moving back up is much harder than being a bit braver on the opening price. When you retire an entry tier or raise it, communicate clearly and tie the change to tangible value (improved product, higher input costs, or capacity constraints) so fairness perceptions stay intact.
Takeaway: Left unattended, “temporary” entry pricing tends to ossify into de facto list price, especially if sales teams or customers anchor on the lower number.
OPERATOR CHECKLIST
◻️ We’ve clearly labeled which offers are entry tiers and which (if any) are true loss leaders – and why.
◻️ For each entry/loss-leader offer, we know: unit variable cost, contribution margin, and expected attach/upsell mix.
◻️ Entry/loss-leader customers are tracked as a distinct cohort with CAC, gross margin per customer, and 12-24 month payback.
◻️ At least one back-end driver (higher-margin SKUs, subscriptions, services) is proven before we scale a loss leader.
◻️ Entry tiers reflect reduced scope or serve-cost (e.g., off-peak, self-service, limited features), not just quiet discounts on the same thing.
◻️ Offers are fenced by segment, channel, or time window so “intro” pricing doesn’t become the default for the whole base.
◻️ We’ve written down an exit plan (date or metric) to retire or re-price each temporary entry/penetration offer.
◻️ We periodically check whether the share of revenue from entry/loss-leader SKUs is proportionate to their strategic role (front door, not the whole house).
SIGNAL TO WATCH
If most revenue is stuck in your entry tier or loss-leader SKUs – and attach, upsell, or renewal rates aren’t compensating – your “front door” is too generous or your upgrade path is too weak.
ONE QUICK ACTION
Pick one entry offer and build a simple cohort view: entry price, unit margin, attach/upsell rate, and 12-month gross profit per customer versus your standard offer. If entry cohorts don’t catch up, redesign or retire the offer.
COMMON TRAPS
Permanent trial mode. “Intro” prices or free/cheap tiers that never end, turning a penetration tactic into your real positioning.
No back-end economics. Running loss leaders without a proven path to profitable add-ons, renewals, or upgrades.
Feature-rich entry tiers. Making the cheap version so good there’s no compelling reason to move up.
Training your best customers to wait for deals. Frequent or wide promotions that reset reference prices and make full price feel unfair.⁴⁵¹⁸
Ignoring cohort economics. Looking only at top-line traffic or unit volume instead of lifetime gross profit by entry cohort.
Copying big-box tactics. Matching national chains’ doorbusters when you don’t have their scale, mix, or purchasing power.
Rolling back without a story. Ending entry deals or raising entry prices with no explanation tied to value or costs, hurting fairness perceptions.
Experiment:
DESIGN CANVAS: ENTRY TIERS & LOSS LEADERS
What it’s for: Design an entry-tier or loss-leader offer that reliably drives profitable downstream behavior (upgrade/attach/repeat) without turning into an unbounded discount leak.
Who it’s for: Pricing owner/GM/RevOps lead working with Sales/Marketing (and Finance) to launch a controlled entry offer and track whether it pays back.
What it does: Builds a structured, defensible entry-tier/loss-leader offer by answering four questions:
What exactly is the entry offer?
How does it pay back on the back end?
What fences/guardrails keep it from becoming your new default price?
How will we track the cohort to confirm it worked?
Use when you need…
Clarity: Forces a clean definition of the offer and the payback path so “entry tier” doesn’t quietly become “discounting.”
Speed: Gives teams a one-sitting canvas to launch with fences and a simple cohort tracker — no pricing science project required.
Strategic insight: Turns entry offers into testable hypotheses with measurable downstream behavior (upgrade/attach/churn), so you learn what actually drives profitable conversion.
This document is provided solely for general informational and discussion purposes and is intended to offer insight into certain philosophies, principles, and approaches that Permanent Equity may employ when partnering with the management teams of its portfolio companies following an investment. The material is illustrative in nature only and does not describe a required, uniform, or exhaustive set of practices or expectations.
This document is not intended to be, and should not be construed as, legal, tax, accounting, investment, or other professional advice, nor as creating, modifying, or implying any legal rights, obligations, fiduciary duties, standards of conduct, or contractual commitments. Nothing herein should be relied upon as a substitute for individualized advice or negotiated agreements.
This document does not constitute, and should not be construed as, an offer to sell or a solicitation of an offer to purchase any securities, investment vehicles, or advisory services. Any such offer or solicitation may be made only pursuant to definitive offering documents and governing agreements, which will contain material information, risk factors, and binding terms that may differ materially from the general concepts described herein.
The practices, decision making frameworks, expectations, and examples referenced in this document are intended solely to illustrate how Permanent Equity may work with certain portfolio companies in certain circumstances. Actual practices vary based on the specific facts, negotiated contractual arrangements, regulatory considerations, industry dynamics, and stage of the business, and may change over time. No representation is made that any approach described herein will apply to any particular company, management team, transaction, or situation.
Nothing in this document should be interpreted as a commitment, promise, guarantee, or assurance regarding autonomy, governance rights, decision making authority, performance outcomes, distributions, returns, or operational results. Past experience, illustrative examples, and general statements of philosophy are not indicative of future results.
Readers should consult their own legal, tax, financial, and other professional advisers regarding the applicability of any concepts described herein to their specific circumstances.
Permanent Equity undertakes no obligation to update or revise this document, and the material may be modified or withdrawn at any time without notice.