As many financial institutions look to shore up the bottom line, many are focusing on pricing as a way of making sure prices are competitive but also don’t leave money on the table.
One way to improve pricing is to use customer price sensitivity as an input. Price sensitivity measures the customer’s reaction to price changes. If the price is too high, it’s marginally profitable, but no one will buy it. If the price is too low, it will be popular, but lose money. Price optimization finds the “sweet spot” in the middle by maximizing total dollars profit.
This approach is different than the marginal profit or risk-based pricing approach many use. Although risk is still taken into consideration, the primary driver is how the customer will react to the offer. Case studies show that profits and market share can both improve when taking this approach.
Although price optimization is a relatively new technology, we predict it will grow steadily over the next several years. Several other analytic technologies are related, such as “next best offer.” We will see an increase in projects that use analytics to tailor customer offers, including price, in order to individualize the banking relationship.
To learn more, CEB TowerGroup Retail Banking and Cards members can access the Technology Spotlight: Price Optimization.