Pricing Optimization: A Practical Guide to a Retail Bank Implementation
Authored by Bobbie Britting, Senior Analyst, Consumer Lending at TowerGroup and
Kathleen Khirallah, Managing Director and Practice Leader, TowerGroup

"Price optimization solutions present an outstanding opportunity for lenders, especially to optimize their profits as well as their application pull-through rates while still managing the various risks associated with particular loans or customers. It is important to note that price optimization does not recommend or demand increasing all loan prices or decreasing all deposit prices.

Rather, it requires a financial institution to understand customers' demand for products and services and their sensitivity to price. Thus, in the case of the loan, it establishes both the price the customer is willing to pay for a loan and the acceptable rate of return for the lender."

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This TowerGroup Research Note focuses on:

• Because the pricing process at FSIs is complex, with many distinct steps, "breakages" frequently occur in the
  process chain.
• An FSI's pricing committee often ignores the elasticity of consumers' demand, usually because the members do not understand, measure, or track demand elasticity.
• Most institutions are still asking, "At what price are we willing to sell our money to borrowers or buy money from depositors?" instead of, "At what price are borrowers willing to buy and depositors willing to sell?"