The Profit Opportunity

Profit-Based Pricing provides banks and finance companies with the opportunity to gain substantial profits quickly. Because of the valuable data that you collect from customers, you are very well positioned to achieve significant financial benefits and gain valuable insights into how customers use and value your products and services.

However, most banks and finance companies are not leveraging data about their customers in their pricing decisions. Strategic use of customer data not only increases profits, but uncovers important insights about how customers value and use your banking products.

Which approach do you use to set prices?

Most banks and finance companies use one or a combination of the following approaches to guide pricing decisions and determine buy rates and fees:

• Cost or Risk-based Pricing: Buy rates and fees are set based on the cost of a product, which takes into account net credit loss due to customer risk, but doesn't consider competitive pricing
• Market-based Pricing: Buy rates and fees are set based on competitive prices, which doesn't take into account the value a customer places on the product or service or the profitability of the loan
• Anecdote-based Pricing: Buy rates and fees are set based on rules of thumb, which doesn't take into account current market and competitive realities
• "Volume"-based Pricing: Buy rates and fees are set based on how hard a salesperson fights to get pricing and credit exceptions to maximize their booked volume - at the expense of lender profitability

Is there a better way to set prices?

Yes. Profit-based Pricing, specifically developed for the financial services industry, was born out of price and revenue optimization (PRO), which is successfully used by airline, hotel, manufacturing, and retail industries.

Why now?

• Customers Engage in Rate Shopping: Customers are more educated about their options and spend time comparison shopping before choosing a banking product. This places more pressure on your business. Strategically using customer insight in the pricing process is a quick and significant way to increase your profits while maintaining market share.
• Focus on Growth: Banks have spent the last decade cutting costs and weeding inefficiencies out of their processes. Few substantial gains can be made using this approach moving forward. The pendulum is swinging from cost-cutting to profit-generation and the quickest and most substantial way to generate additional profit in your business this year is by adopting a Profit-based Pricing approach.
• Gain a Competitive Advantage: Because most banks use a risk-based approach to pricing, it has become the industry standard and no longer provides an edge over the competition. Leveraging customer data to better tailor your prices by product and customer segment will help you achieve a competitive advantage.
• Availability of Data: Banks have the customer data required to adopt a Profit-based Pricing approach. This information provides invaluable insights about the customers who have accepted and declined the opportunity to use a bank's products. Analyzing that information and incorporating it into your pricing practices enables more profitable pricing.