Aggressive pricing: Is it a Bane or Boon for Banks? 🏦
What is Aggressive Pricing in Banking?
Aggressive pricing is a risk that can make or break a bank. If applied properly, it can increase the bank’s profits. But only used during a radical shift in the banking market. An example was the Santender bank in Spain launched its “Super Account” that doubles the interest rates of their depositors during the 1980s when the country is liberalizing its interest rates. It worked and now the bank’s market share has doubled. But this can only be used during an absolute change in the banking market and only the first clients benefit from it.
Aggressive Pricing Could Start a Price War
This kind of pricing strategy could trigger a price war against other banks and destroy their credibility. It must not be used so loosely when banks are losing money or market share. There are other pricing strategies banks must consider first.
Pricing strategies and its application
Pricing strategies and its application in banking have shifted radically from deposit interest rate to digitization age. Banks which traditionally based their profitability on deposit interest rate are finding this is no longer applicable. In the light of recent international bank scandals, customers became wary of where to put their money. Therefore, new regulations that stem illegal activities are in place.
Also, the flourish of digital banks has forced traditional banks to develop more aggressive pricing strategies in order to retain their clients and attract new ones. We will discuss those pricing strategies later.
Banks are under pressure to find ways to secure fast and sustainable revenue stability. Moreover, there is a growing need for banks to improve their front-line staff support and overall performance, as well as middle and back-office functions. Developing value-based pricing strategies will not only gain leverage against the competition but will help banks to keep their edge in the market.
Procedures such as passing the cost of funding to clientele with an increase in rates are regulated by government agencies to prevent bank frauds. In light of this, clients are finding it easier to open banking rules, websites for product comparisons and enhanced on-boarding processes to find out if the bank is engaged in unfair pricing.
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Aggressive pricing: Is it a Bane or Boon for Banks?
Does Bank Pricing Strategy make a difference to customers?
With the rise of digital banking, banking executives are finding they need to get their customer pricing right to stay ahead of their competition. Here are the five premises of customer-focused bank pricing:
- Doing what is right for the customer and rewarding loyalty. Of course, the prices must be fair and show the true value of the service or product.
- Setting prices according to customer profiles to find and protect profitable revenue growth. Furthermore, considering factors like the customer value proposition: i.e., things like the willingness of the client to pay and the asset’s risk profile should all be reflected in the full economic value/profit equation.
- Controlling the funding cost. In practice, any bank can find funding to finance loans. However, the real challenge here is finding the right funding without cutting into the net interest margin.
- Manage the cost of funding. Banks are now seeking to control funding volume without compromising net interest margin.
- Increase market share. Banks are using more promotions and offers to attract desired client types and products to them. These offers and price are commonly optimised to ensure they protect their margins.
- Understanding client types or profiles: Banks are paying more attention to why and how people buy from them to give the bank an edge. They are now offering preferred client segments tailor-made offers that suit the needs of their client base. Whether this is: waiving fees, frequent-flyer points or interest rate discounts on loans and mortgages.
Now, unlike any time before, banks are taking a more agile approach to pricing. They are keeping their edge and thinking of their long term pricing strategy execution. This means constantly revising their pricing and incentives to gain new customers and reward loyalty.
Technology has provided the banks’ real-time analyses on customer data and techniques to give the opportunity to try out dynamic pricing methods and segmentation. They can now assess the profile of the customer – including the amount of risk the bank is willing to give. Not only will banks now gain profits with their bank pricing strategy, but they can also go after the right customers and know what loans they can afford to pay before they do.
The essence of strategic planning is that banks can refine any fees paid by their clients and give them personalised rates based on their specific banking profiles. For instance, they will give incentives to a particular client in order to give them the increased saving capacity they want AND to also gain their loyalty as well.
Strategic pricing for banks is tied up in a dynamic pricing structure. A pricing structure based on the relationship the bank has with its clients. What’s more, strategic pricing for banks comprises two parts:
- Strategic pricing – this strategy is more focused on client demand and not on the product. That’s to say, it requires a purer form of dynamic pricing as well as injections of yield management as demand increases.
- Pricing execution – this shifts from the products as the revenue earner to the clients’ profiles i.e., how they perceive and value the bank’s services and products AND whether it is in retail or corporate banking.
Often, deposit pricing is not included in a corporate strategy of bank pricing. Largely, this is because it is risky to increase bank revenues by enticing their clients from well-funded businesses. To improve this, it needs three scenarios:
Optimal strategy. An optimal strategy is the most fundamental bank pricing strategy. Providing a nominal fee is regulatory for the clients’ bank deposits. Hence, optimising the deposit fee is a strategic tool to utilise. The three models adopted by banks to deposit pricing are as follows:
- Passive followers – whereby customers deposit their money to the bank – without doing any business with the bank.
- Aggressive pricing – Generally used by banks during periods leading up to change. Essentially banks in this scenario will allow a small window of opportunity for all client types to deposit their money.
- Pyramid pricing – This is when banks discount their deposit prices OR use customer deposits for investment to achieve maximum and accelerated returns.
Differentiated pricing in banking focuses largely on targeted client acquisition. Not all depositors are equal. With that in mind, banks target cash-rich businesses like entertainment, technology, education and sports.
By combining maximum rates to selected clients, banks can optimise revenues by giving better rates to those who have large cash deposits or potential cross-selling clients. For example, they can offer several volume pricing curves and give big depositors favourable prices.
Cost of funds (FTP) Pricing
Cost of funds pricing is also known as internal or funds transfer pricing. Banks have a basic principle on businesses lending. The cost of funds like loans have track funds – external pricing – whereas liquid loans – like credit cards – have an internal guide to calculate pricing. Basically, the cost of the fund comes from the actual funds obtained in the market.
Relationship-based pricing is another pricing strategy used by banks. This is when the bank decides to set prices based on their relationship with clients. Chiefly, only strategic clients that have a mutual benefit with the bank can avail of special privileges provided by banks offering relationship-based pricing. To be sure, the criteria with relationship-based pricing are those with substantial loan and deposits volume, numerous products on hand, personalised Economic Value Added accounts (EVA) and extra value to bring to the relationship.
As you can imagine, the strength of client relationships with the bank can vary over time and between clients. Hence, relationship-based pricing can vary a lot between different banks. Consequently, differential pricing is often at the discretion of the bank manager who chooses the terms and rates.
IT Systems Essential to Bank Pricing Strategy
All these pricing approaches (listed above) need the support of AI-driven pricing. Hence, IT systems to collect and analyse big data on customer pricing are crucial. In particular, we note that customer-focused pricing in banks requires a lot more formal guidelines. Namely, to ensure prices for lending and saving are in the customers’ favour. These include: actual product costs, client relationships, and projected profits.
How has bank pricing changed over the past few years?
In the past, bank pricing strategy was in the hands of the bank manager. Can you remember the days when it would take months for the bank manager to clear home loan requests?
Well, with new pricing and IT systems, it now can take a matter of minutes to get data on a customer and 2-3 days to get loans approved.
An effective IT system integrates into the bank’s overall database to improve speed and decision making accurately. For example, new IT systems now have unrestricted access to funding costs from the ALM system, client histories, CRM product information, information from the risk management system, and capital costs. Which means that, in a touch of a button, some IT systems can produce the data the bank needs like:
- price options
- customer importance
- profit impact
- and negotiation strategy tips
But an IT system alone is not enough to improve pricing decision making in banks. No, in the background, there’s an established professional pricing team informing and managing pricing structures and operations too.
In particular, a pricing team’s mission is very strategic with some critical operational tasks to drive as well. A pricing team is responsible for designing and implementing the new pricing strategy. They also choose the key inputs to integrate within an IT system. Then analyse the output to determine price bandwidths and clearer parameters for their pricing structures. Their remit from here would include things like: pricing policies, review, management, support and guidance.
- The international bank scandals and aggressive pricing in recent times has put a strain on customers’ trust in banks.
- New pricing structures are implemented to attract more depositors and retain customers’ loyalty.
- IT hardware and systems are now integrated within the banking system. Principally, to analyse customers’ banking profile, risk management and new pricing schemes.
- A pricing team informs bank pricing strategy and implements the new rules and pricing strategies required for different products, segments and divisions.
- The old system of deposit rate interest profits is obsolete. Banks are now testing new banking pricing and IT systems to increase profitable revenue growth.
- Competitive measures and aggressive pricing are now being implemented against the proliferation of digital banking to retain customers’ loyalty. That is to say, measures like lower interest, lower deposit pricing and other benefits await the customers if they continue their banking.
- An effective IT system can aid the pricing team in setting the right bank pricing strategy for the bank.
Aggressive Pricing Strategy: How To Solve Difficult Pricing Problems 💭
“Should our business take an aggressive pricing strategy to solve our pricing problems?” The answer depends on the problem you are trying to solve. Deciding on the best pricing strategy for new products and your customer base depends largely on your diagnosis of the problem, and whether people agree with you. In every business, for example, there will be some conflict about what the problem really is and the best pricing solution to solve it. It is natural for people to be “conflict-averse” when they think about changing their approach to pricing.
Conflict aversion occurs because people are not naturally comfortable dealing with or using an aggressive pricing strategy. Largely, this is because an aggressive pricing strategy is more likely to create potential conflict and disruption in the market than other strategies. This is why you really need a good problem-solving approach to verify your strategy.
But let’s not rush to the solution or use rules of thumb answers either. The goal here is (and should always be) to make ourselves and our organisation more “conflict-friendly,” “conflict-competent” and more comfortable with problem-solving. And the only way to do all of these (and know whether the solutions and strategies we select are right) is to give ourselves more room and better problem-solving techniques.
In this article, we’ll explore a useful problem-solving process which you can use to find the best pricing strategy for your business whether this is an aggressive pricing strategy or not.
We will argue that large companies need a dedicated pricing team to improve problem-solving in the business and capitalise on product innovation.
We believe that pricing is a process; and that the right pricing team will help businesses to determine if an aggressive pricing strategy is indeed the right option for the business, removing, in turn, the risk of testing different pricing options and strategies.
People are born problem solvers. We love to find solutions to problems. But we also have a tendency to rush into solution mode and can procrastinate when pricing problems are new or complex. The biggest challenge, therefore, is to overcome the tendency to come up with a solution immediately. It is a mistake to put the solution at the beginning of the process when what we really need is a pricing solution at the end of the process. We have to use frameworks, checks and reminders to resist the urge to find a solution right away. Otherwise, we’ll find that we haven’t really addressed the right pricing problems at the right time and the solution is far from optimal.
Below listed is a suggested problem-solving process to follow for pricing problems.
By using techniques like these, you’ll be able to find out with confidence if an aggressive pricing strategy is right for your business or not:
1. Find the Right Pricing Problems to Solve
Sounds simple, but it is an aspect that many people rush past. All too often, approaches to price problem solving are reactive. People tend to focus on product innovation rather than think about how to price a new product based on customer value or willingness to pay. After this, they tend to wait for the customers’ reaction to a new product and see how well it is received before they do anything about the price. After that, data is collected. But, people are none the wiser about how customers value the new product. What’s more, companies are still vague on the best price for a new product even though they’ve spent so much on product innovation and research.
In fact, we believe that this first step is one of the most important stages in any price problem-solving process. Because if you are not addressing the right pricing problem, you’re not fixing it either. The business, in turn, is going to lose money. And potentially, your team may use up time and resources on things that don’t really matter.
So our advice here is, firstly, when you start the problem-solving process, take a proactive approach to problem-solving. Find other means to improve the present pricing problem. Look at the problem from all angles. And, you should maintain a proactive and positive problem-solving mindset.
Think about how often you spend time and resources on price problems. Are they low on the priority list? Should you be focusing on other more pressing problems? Are you putting off solving this problem because you know you’ll struggle with it?
Don’t throw the towel in when a problem is tough. Draw on all that you know. Tap into the skills and expertise of your team to get their view. But more importantly, be open to evaluating a pricing problem no matter how difficult this may first appear to be.
2. Define the problem before jumping into an aggressive pricing strategy
We find that once people are comfortable that they know what the problem is, they don’t feel they need to define it. This is a big mistake. Moving straight to price analysis and then solution delivery is the wrong order. You must define and document the problem and distribute to the team and key stakeholders.
In fact, defining the real problem is one of the secrets of effective problem-solving. This is because problem definition helps you and others to differentiate a problem from other problems. If you can see a problem is clearly different from another problem, you’ll know straight away that one pricing problem requires a different approach or indeed a higher level of expertise to solve than a more basic pricing problem.
In many regards, solving problems is attitudinal. You need to see every problem as an opportunity. A positive and proactive attitude will give you the motivation to define a complex problem. You need a ‘growth mindset’ to focus on the potential and opportunity in a given situation. A growth mindset will help you to move from a problem focused to an opportunity focus.
3. Analyse the Problem
When you start your price analysis, you are at the stage of discovering facts and making links. You should not be discovering what the problem is (this is what you do in stages 1 & 2). In essence, price analysis is about finding out what you know about a given problem or scenario; and what you don’t know. A rigorous price analysis should be based on a set of questions, followed up by a set of checks, to identify causal relationships inherent in a problem. From here, you can analyse what it is and what it isn’t.
One of the most important aspects of rigorous price analysis is a pricing team. The right pricing team will ask the right questions and know what to look for in the data or commercial situation. They will get the data you need to discover the facts you need to know. They will identify relationships and outliers of importance. And, they will help you get to the nub of the problem and make connections in the data and market that translate to profitable pricing insights.
Analysis often requires a detailed examination of large datasets and commercial situations. You need to apply problem-solving techniques to both data and commercial information. Pricing is not just numbers based. At this stage, it is important to give the pricing team time and space to evaluate the facts and think laterally about pricing solutions/options.
Placing a high value on thinking, analysis, evaluation, and exploration of ideas is a crucial leadership concept. A good pricing leader does not confine creativity; they open the pricing team up and enable them to think and learn.
4. Select the best solution: Is an aggressive pricing strategy really the right option for you?
The next phase in the problem-solving process is about finding alternative options/solutions to a problem. Being content with one solution is not good enough. It’s likely that more than one solution is viable. To start this stage, ask yourself: Which pricing solution fits the problem?
To develop a good solution requires creativity; you need a curious and adaptive pricing team to create options for you. Average teams tend to be content with one solution. Furthermore, high performers are always looking for alternative viewpoints and solutions.
Inevitably, there will be constraints restricting you and the team. Maybe issues about whether solutions fit within what is currently done, and various stakeholders’ views to consider. Therefore, solutions need to be evaluated in relation to strategic, people and operational needs.
To find the right pricing solution, use the criteria below as a guideline:
- Operational validity – Can you take action on this idea, or can you only talk about it? Can you really do something right away to bring about the kind of pricing solution you desire?
- Economic validity – Will the idea produce profit margin? What would be the early indicators that it was working?
- Personal commitment – Do you have the confidence in the idea? Do you really believe that the new pricing strategy will work?
Take your time answering these questions. Is the problem of organisational significance and can the solution impact strategy?
5. Implement the solution for aggressive pricing strategy
Every good solution needs to be tested. Implementation of any given pricing solution goes directly to execution. However, before putting your decision to the test, check that you have:
- carefully defined the problem and the desired outcome
- analysed the problem at length
- collected the right data and fields
- explored all possible alternatives, and considered every conceivable option
- chosen the best alternative solution after considerable deliberation.
To implement the best solution, make sure that you have followed pricing strategy guidelines, workflow processes and execution documents. Additionally, be clear on the problem; this means the definition of the problem, outcomes, and the plan. But throughout, be open and flexible to adapt your solution. These mean be ready to pivot and adapt your solution or scrap it if it fails the testing process.
Ask yourself what will be different when you solve the problem and what will be the outcome? What are the objectives? And do people have the same understanding of the problem as you?
Answering questions like these should clearly indicate how and if you’ll get the outcomes you want.
6. Evaluate and learn from the problem-solving techniques listed above
Now that you have a pricing solution to a problem, don’t forget to apply the process to every problem. People often enjoy the relief of solving a problem and don’t apply the same rigour to other problems. It is also common for people to rush to solve the next problem with the same answers. Don’t do this.
Take time to understand every problem using this structured problem-solving process. Rushing to implement an aggressive pricing strategy without really knowing if it’s right for your business or the market at this time could lead to margin loss. In fact, the definition of a good strategy at one point in time may not be good at another point in time. Not every customer can be treated in the same way. Customer value changes as customer trends and preferences change.
Solving pricing problems in a timely manner is essential. In effect, employers highly value individuals that they can trust to both identify and then implement pricing solutions as fast and effectively as possible. But give yourself time to get better at this. Don’t rush to solution mode just because you feel you need to give people an answer. It will backfire on you.
Put yourself into new pricing situations to get exposure to new opportunities to solve pricing problems.
Learn from colleagues who are skilled price problem solvers. Observe how those colleagues solve problems. Ask them what they read. Additionally, debate with them about anything to see how they think. They can help you improve your own pricing skills and broaden your thinking.
Don’t run off with half baked ideas. Resist the urge to start collecting data and building pricing models before having a clear idea of the problem. Remember that carefully analysing the problem and taking the time to find alternative pricing solutions will prevent you from making mistakes.
Getting the right pricing solutions requires meticulous analysis of a range of data and information sources. But more importantly, problem-solving is a team effort. Identify the problem and get the whole pricing team together to achieve a common goal. In this way, you’ll get diverse perspectives on the problem and can debate real issues and create better pricing solutions.
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