What comprises a successful, modern bank’s product pricing strategy? Given the way customer expectations have evolved over the last few years, most banks would say that personalized, relationship-based pricing is the gold standard. They are not wrong, but to be successful, their pricing strategy needs to include some important steps before it gets to personalization. Pricing is a function of not just the product itself, but also the market context, the bank’s objectives, expected profitability and revenues, as well as customer centricity. Let’s dive in.
Banking Products are Different from Other Products
Banking products are unlike anything else in the market. A manufacturer selling a piece of machinery will know the exact costs of creating that machinery, ranging from raw materials to time, skills, and effort involved. In comparison, it is difficult to figure out exact input costs of banking products. They are intangible, service oriented, and incorporate volume considerations as well. For example, a savings account is a banking product, but it does not provide anything physical. Instead, it offers customers the service of safely storing money and earning interest. And the volume of money going in each savings account differs from one customer to the other, which may have a bearing on pricing and offers the bank offers. Banking products are also subject to regulations and interest rate fluctuations. Products like mutual funds come with considerable risk for both customers and the banks themselves.
Understanding the Market Context and Product Position
Most banks today are focusing on offering customized and relationship-based pricing models to their customers. While this is required to meet changing customer demands, a bank needs to consider more factors to arrive at a product price that makes financial sense for them. Pricing optimization efforts must be based on data and quantitative understanding of costs, organization objectives, market conditions, competition, regulations, and even the desired positioning of the product and the brand. They must understand the market context within which they operate and determine what position they want to be in within this market. They can choose to be a premium offering or be a medium-priced brand. They can start off with low prices and increase later. They can offer low prices with high deposit rates, or they can choose to offer differentiated pricing for different customer segments. They can even decide to take a dynamic approach to pricing by linking customer behavior to their pricing offers. This is a crucial foundational step that will help shape a pricing strategy later.
Choosing the Right Strategy
Once market positioning has been determined, banks must move on to pricing strategies. The right strategy and implementation can help maximize profitability, attract and retain customers, and provide the bank with a differentiated competitive advantage. They can choose to work with the cost-plus pricing approach where they include a fixed margin to the cost of delivering a product. They may adopt value-based pricing where price is based on the customer’s perception of its value. This works well for premium products like investment banking. Banks can also offer pricing levels that increase with the number of features offered. For example, they can offer savings accounts at higher interest rates for larger deposits. For products like mortgages, banks may consider adjusting their prices based on the competitive landscape. They may also offer risk-based pricing that aligns price with a customer’s risk profile for high-risk customers and market segments. Their pricing strategy must also include effective bundling and offer prices such as multiple products clubbed together into a package or promotional prices to attract customers. Freemiums are also gaining popularity where banks offer basic products free and charge for premium products. However, banks must ensure that their pricing strategies comply with the regulations and laws of the country in which they operate.
Banks don’t necessarily have to choose one or the other strategy. They can offer different combinations of pricing models to different sets of customers based on dynamic segmentation, their relationship with the bank, their unique requirements, the commitments they make, risk profile, and future value. This is where relationship-based, personalized pricing comes in. But it’s important for banks to remember that determining market position and strategy will help in creating a robust foundation for customized value-driven pricing model that make financial sense for the bank and resonate with customers.
The Technology Driving Pricing – To Build or Buy
The last piece of the pricing puzzle is how banks can deliver their pricing strategies effectively to customers. And the answer lies in technology. Banks need robust pricing engines that can help them implement their chosen pricing strategies, go through customer data to understand behavior and requirements and offer personalized pricing. But should they build such a system in-house or opt to work with third-party providers who have a ready-to-deploy solution?
Proponents of build approach advocate for the control over the development process it offers, as well as the high degree of customization as software features can be created to meet the bank’s needs. But in-house development comes with high initial costs that will only increase if timelines extend. And banks often do not have the skilled technology expertise required to build such a robust platform.
On the other hand, there are experienced providers offering robust, cloud-native, and microservices-based pricing engines that can help banks seamlessly roll out and manage dynamic pricing models. Such platforms can be easily deployed over core banking systems to function as an agile, business layer that separates customer or market facing functions from core banking processes. This ensures that the critical core banking systems are not touched, while the bank is able to roll out well thought through, innovative, and customer centric pricing strategies and models. Such a pricing engine can be implemented quickly, and banks can benefit from the provider’s expertise and on-going support at lower costs.
Banks must carefully consider their business objectives, budgets, timelines, and available resources to decide on a technology approach. As competition increases and customer loyalties wane, they must focus on delivering comprehensive pricing strategies that meet their business and revenue objectives as well as drive customer satisfaction. A robust pricing engine can help them roll out pricing innovations seamlessly and drive customer engagement and retention, while ensuring profitability and revenue growth.
Optimized pricing models are crucial for long-term growth. Banks must now focus on data-driven pricing strategies to differentiate themselves in a hyper-competitive market and ensure long-term profitable customer relationships.