To drive customer loyalty and bank profitability, banks should understand customer “willingness to pay” better. The old rules about how customers value products and services are out of date. Loyalty is hard to come by. Technology makes it easy to have multiple financial relationships.
Proper pricing may be an important key to customer relationships and the bottom line. A PwC analysis of the factors contributing to bank profitability shows that a 1% change in the price of a product or service can move profit margins up to 4 times more than a similar increase in sales volume. Likewise, a 1% change in price can lift bank profitability twice as much as a 1% change in fixed costs and 1.5 times more than a 1% adjustment in variable costs.
The analysis also shows that raising volume only goes so far, and since banks have squeezed out many costs, that option might not be especially viable, either.
So price might be the best avenue to success. However, banks can’t simply raise prices and expect customers to stay in line. That’s why leading banks are exploring holistic, data-intense, customer-centric pricing strategies – ones that help them attract and retain customers while building profitability.
It is more than just price that determines the value customers place on products and services. Customers are guided by a complex web of social, emotional, financial and psychological influences. Their banking choices extend from traditional institutions to online banks and non-banks, such as retail stores. And they have a breaking point: if a bank raises the cost of a service or adds a fee, they can quickly move elsewhere.
For banks, the basis for an effective pricing strategy is recognizing how customers make decisions. Or, in more technical terms, what their price elasticity is. Some banks use “voice of the customer” (VOC) programs to gather intelligence about how customers make decisions.
These research efforts employ in-depth interviews, surveys and focus groups. The investigation doesn’t end there, though. VOC findings are combined with facts that are readily available to banks, such as information that clients provide when they open accounts.
Taken as a whole, the data can help banks answer questions such as:
More banks can benefit from a price optimization strategy. But they are often reluctant to do so, bringing up objections from regulatory concerns to a belief that their data aren’t good enough to act on.
Perception isn’t the same as reality, though. New regulations, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, will actually be better supported and managed with a program that increases the focus on customer value.
Likewise, our experience working with financial institutions shows that information does not have to be perfect. Most banks can leverage the data they already have to get a program started and build from there.
To design and implement winning customer-centric pricing programs, successful banks will engage the entire enterprise– leadership, information technology, sales and marketing, and more.
The issues to examine include:
Knowing your customer is just the beginning of the process. Banks that create ongoing, effective pricing programs that convert data into meaningful action will be better positioned to use pricing to their competitive advantage and improve bank profitability.
To learn more about PwC’s views on bank pricing programs, see our report at “The Price of Success: Aligning Pricing with the Customer Value Proposition”.
To begin a conversation, contact John Garvey, PwC's U.S. banking leader.