Price management is one of the most powerful tools that financial institutions can use to increase the profitability of their business. The correct implementation of a price strategy differentiated by customer segments can generate margin growth of between 10% and 30%.
However, obtaining these results is not an easy task, since the necessary changes in the information systems, the difficulties of changing commercial systems and the lack of focus on price management make implementation complex.
Following its own methodology, Cognodata has helped several international financial institutions implement new price management strategies that have allowed them to generate higher margins and volumes and lead their markets.
Pricing strategy with customer vision and driven by analytics
Banks have more than 200 different pricing concepts and in Cognodata’s experience, more than 50% of customers do not know what they pay for the three most common concepts. In addition, there is a tendency to think that price sensitivity is homogeneous, but the reality is that customers show clearly differentiated behaviors.
The differential value that we contribute from Cognodata is found in our approach: we combine the analytical knowledge of each one of the clients together with the sensitivity to the price of the different segments. The estimation of sensitivity metrics through statistical methods and their final calibration through a rigorous test and measurement, allow optimization of the decision or recommendation of action regarding the price policy.
The critical success factors for implementing a successful new pricing strategy are:
1. Customer intelligence and price sensitivity
The internal and external information available allows us to estimate a series of basic metrics for the definition of a differentiated pricing strategy. Thanks to the estimated customer metrics we can know:
- Which customer segments are very sensitive and very little sensitive to price?
- How does bonding influence sensitivity?
- Which customers are going to compensate for a price drop with the largest increases in balances or contracting rates?
- What pricing strategy maximizes long-term value?
2. Analysis of the competitive environment and positioning
Taking into account the market structure and its potential reaction, it is necessary to define a clear position for the bank in comparison with the most important competitors.
For this, it is essential to know the importance that each of the price components have for customers, since it is possible to maintain a reasonable price image, being competitive in the services with greater visibility, but at the same time with higher prices for the rest of the services.
3. Multichannel and bundles
The bundling of certain products and prices through different channels is crucial to define the pricing of the service and reduce service costs or increase margins. A pricing policy must be established in line with the multi-channel strategy with the aim of increasing revenue, profitability and customer loyalty.
To do this, it is necessary to align pricing, segmentation and personalization of the offer, optimizing multi-channel marketing actions in cross-selling and recruitment. The service bundle offer makes it difficult to compare prices with the competition and improves the perceived value proposition.
4. Commercial implementation
For the implementation of a pricing strategy, it is necessary to involve the commercial area from the beginning, taking into account the changes that will affect its commercial processes and commercial direction, tools and incentives. Identifying risks and limitations of the project from the diagnosis, and carrying out the correct change management are decisive for the success of the implementation.
5. Tools and operations
In the implementation of a pricing strategy, it is very important to ensure information flows and have tools that allow processes to be automated. On the one hand, they must serve as support for strategic decision-making through advanced price simulators.
They must also be present at the point of decision with the customer in the form of a real-time quoting tool. The information resulting from the process must be recorded in objective monitoring reports in order to be able to make future adjustments and improvements to the price plans.
6. Senior management commitment and clear responsibilities regarding prices
Some successful financial entities have created the figure of the “Pricing Manager”, who is responsible for defining new strategies, their implementation and ensuring their monitoring and thus achieving the planned price objectives.
Impact on the business measured and contrasted
Cognodata developed a pricing project within the Payment Means area for one of the most relevant multinational banking entities, which allowed the financial entity to position itself as the player with the highest profitability in the market and obtain customer growth 20% higher than the industry average.
The success of the project lay in the ability to simulate prices at the decision point, in commercial monitoring and, ultimately, in the involvement of middle managers in the project. Key to this was developing the analytics -driven customer management process .
High competition in the financial sector has led leading entities to look for new tools to increase their profits: pricing policies are an opportunity and prove to be effective in improving margins and achieving a wide profit potential, hidden until now.
The use of analytical models of price sensitivity combined with the analytical knowledge of the client, are allowing to exploit the willingness to pay of the clients, thus increasing the benefit of the entities. This strategy allows the commercial network and the marketing areas to be provided with tools that, at the time of direct contact with the customer, quote prices in real time, adjusted to the users’ willingness to pay and with a high impact on margins.