Of all the levers that today’s banks can pull to increase revenue, pricing is among the most impactful—a significant driver of growth in customers, revenue and profits. An optimal pricing approach for a bank can increase net interest income by $600,000 annually and yield a 20 bps increase in near-term net interest margin on new balances—all while increasing customer acquisition, retention and satisfaction.
Eight key tenets can guide your pricing optimization strategy:
- Create a 360° view to properly segment customers. Successful pricing is dependent on your customer segmentation and the personas you have identified— groupings of traits and behaviors based on common customers’ needs, desires and goals.
- Incorporate competitor data. How does your pricing compare to your competitors’? This knowledge will have an impact not only on revenue and profitability, but also on pricing negotiations.
- Understand price sensitivity of each customer segment. What are the reactions of your customers to both price increases and decreases?
- Ensure adaptability to volatile market environments. it’s important to have a pricing strategy that accounts for up and down markets and is robust enough to withstand an unpredictable environment. This requires outlining what we call an “extreme market playbook,” which can minimize the fluctuation in your margins and profitability.
- Obtain buy-in and sponsorship from the C-suite. Without C-level support, you risk losing your organization’s support as your initiative competes with other priorities.
- Create pricing, products and offers that incentivize future behaviors while also meeting customers’ current needs. A relationship pricing strategy that rewards only existing relationships will deplete the P&L. Instead, you need a comprehensive long-term relationship strategy that is structured to incentivize future behaviors.
- Ensure that your systems can effectively support your pricing strategy. After you have determined the granularity at which you want to price, determine whether your existing systems and data can support your approach to pricing optimization.
- Ensure that any constraints are transparent and measurable. Understand constraints such as pricing moves that would prevent a truly optimal pricing strategy. These must be transparent to the institution (i.e., supported by data) and measurable.
With the right data and data frequency, and proper attention to these eight pricing tenets, banks will be able to design and execute an optimal, constraint-adjusted pricing strategy.