FIVE STEPS TO CUSTOMER-CENTRIC PRODUCT PRICING

Satya Swarup Das, Senior Solution Architect, Virtusa

The digital age has changed the battlefield for banks. They face disruption from fintechs, and the challenge of tech heavyweights like Amazon entering the financial services field emphasises issues around banks’ aging infrastructure. All of these problems must be navigated whilst ensuring continued profitability. Yet, as boardrooms focus on employing digital innovation to their advantage, crucial questions around how to stay profitable are being abandoned – in particular, the fundamentals of product pricing.

Product pricing is an area many banks are ignoring at their peril. Today, a majority of banks are still working on a ‘cost plus’ approach when deciding the price of their banking products while also keeping an eye on competitors’ pricing. The result is that a great many offerings look quite unidimensional from a customer point of view, as there is hardly any innovation. The age of generalised segmented offers is over – customers want individualised offers that make sense to them specifically. In all activity, including pricing, banks need to shift from a product-centric mindset to a customer-centric one.

Changing the perspective

Research has repeatedly found that, regardless of geography, the price is one of the biggest reasons why customers shift their loyalty from bank to bank. For all the work going into digital transformation and shop-front improvements, this highlights how product pricing remains a core concern for customers. With this in mind, there are a number of steps banks can take to alter their pricing strategies and improve the customer experience as a result.

• Change segmentation criteria: Today, many banks use geographic segmentation to divide up customers and tailor offerings. However there are far more logical clusters that can be used; such as interests, identification, and financial situation. Products have to be rethought and redesigned based on customer demand analysis from these profiles, and pricing dynamically applied depending on factors such as usage and price sensitivity. Doing so requires banks to deploy machine learning based analytics.
• Continuously updated profiles: Banks need to ensure customer profiles are regularly re-evaluated to accommodate changing circumstances, in order to maximise life value. A customer on boarded with a particular product and pricing might work at that point in time but several years later, her situation could be entirely different, requiring different products. Continuous augmentation of the customer profile is therefore necessary, allowing banks to understand the customer’s life stage, preferences, and social interactions. This data can be used to draw out meaningful insights, radically improving the type of pricing and product offers made available.
• Loyalty oriented pricing: How often do we see new customer bonuses with loyal users being ignored? If product design and pricing is targeted towards retaining customers – as it should be – then banks need to ensure their prices reward loyalty. Banks must proactively send relevant offers and loyalty points to customers to keep them engaged year after year. These offers act as a powerful incentive to stay with a brand, while also offering a chance to upsell new services.
• Dynamic pricing: When it comes to product pricing, traditional banks often are bound by the fact they operate within low margin and regulatory constraints. This means it’s even more important to price dynamically so that net profitability is maintained. Customers aren’t always attracted to low pricing or discounts, and there are many factors that impact this decision. These include, demand, availability of similar level of service in the market, and urgency of the service – that banks need to be aware of and able to adjust accordingly.
• New offerings: By partnering with third party service providers, banks can include more unconventional services into their products, such as a mortgage loan in partnership with another firm that provides small financing options (e.g. for smaller purchases such as furniture).Traditional banks may argue they already offer such financing options through credit cards, but by positioning themselves as a conduit to all of a customer’s financial needs, the bank becomes a part of life of the customer – going far beyond the usual bank/consumer relationship

Preparing for the shift

In the future, banks profitability will be driven by the careful use of analytic tools, the ability to extract meaningful data, and a solid pricing strategy. Pricing cannot sit within one department but will become the collective responsibility of everyone from marketing and sales, to product management and customer services. It needs to be inculcated as a core part of the organisational culture.

The above steps represent a substantial shift in the way banks think about pricing, but there are a number of commercial, off-the-shelf solutions available in the market today to help make that transition. Banks have a range of options to suit them; while there is no one-size-fits-all solution, by devising a strong pricing strategy and reviewing the offerings of firms like Zafin, Nomis and Suntec, each bank will be able to find a vendor that meets their needs.

Satya Swarup Das, Senior Solution Architect, Virtusa

The digital age has changed the battlefield for banks. They face disruption from fintechs, and the challenge of tech heavyweights like Amazon entering the financial services field emphasises issues around banks’ aging infrastructure. All of these problems must be navigated whilst ensuring continued profitability. Yet, as boardrooms focus on employing digital innovation to their advantage, crucial questions around how to stay profitable are being abandoned – in particular, the fundamentals of product pricing.

Product pricing is an area many banks are ignoring at their peril. Today, a majority of banks are still working on a ‘cost plus’ approach when deciding the price of their banking products while also keeping an eye on competitors’ pricing. The result is that a great many offerings look quite unidimensional from a customer point of view, as there is hardly any innovation. The age of generalised segmented offers is over – customers want individualised offers that make sense to them specifically. In all activity, including pricing, banks need to shift from a product-centric mindset to a customer-centric one.

Changing the perspective

Research has repeatedly found that, regardless of geography, the price is one of the biggest reasons why customers shift their loyalty from bank to bank. For all the work going into digital transformation and shop-front improvements, this highlights how product pricing remains a core concern for customers. With this in mind, there are a number of steps banks can take to alter their pricing strategies and improve the customer experience as a result.

• Change segmentation criteria: Today, many banks use geographic segmentation to divide up customers and tailor offerings. However there are far more logical clusters that can be used; such as interests, identification, and financial situation. Products have to be rethought and redesigned based on customer demand analysis from these profiles, and pricing dynamically applied depending on factors such as usage and price sensitivity. Doing so requires banks to deploy machine learning based analytics.
• Continuously updated profiles: Banks need to ensure customer profiles are regularly re-evaluated to accommodate changing circumstances, in order to maximise life value. A customer on boarded with a particular product and pricing might work at that point in time but several years later, her situation could be entirely different, requiring different products. Continuous augmentation of the customer profile is therefore necessary, allowing banks to understand the customer’s life stage, preferences, and social interactions. This data can be used to draw out meaningful insights, radically improving the type of pricing and product offers made available.
• Loyalty oriented pricing: How often do we see new customer bonuses with loyal users being ignored? If product design and pricing is targeted towards retaining customers – as it should be – then banks need to ensure their prices reward loyalty. Banks must proactively send relevant offers and loyalty points to customers to keep them engaged year after year. These offers act as a powerful incentive to stay with a brand, while also offering a chance to upsell new services.
• Dynamic pricing: When it comes to product pricing, traditional banks often are bound by the fact they operate within low margin and regulatory constraints. This means it’s even more important to price dynamically so that net profitability is maintained. Customers aren’t always attracted to low pricing or discounts, and there are many factors that impact this decision. These include, demand, availability of similar level of service in the market, and urgency of the service – that banks need to be aware of and able to adjust accordingly.
• New offerings: By partnering with third party service providers, banks can include more unconventional services into their products, such as a mortgage loan in partnership with another firm that provides small financing options (e.g. for smaller purchases such as furniture).Traditional banks may argue they already offer such financing options through credit cards, but by positioning themselves as a conduit to all of a customer’s financial needs, the bank becomes a part of life of the customer – going far beyond the usual bank/consumer relationship

Preparing for the shift

In the future, banks profitability will be driven by the careful use of analytic tools, the ability to extract meaningful data, and a solid pricing strategy. Pricing cannot sit within one department but will become the collective responsibility of everyone from marketing and sales, to product management and customer services. It needs to be inculcated as a core part of the organisational culture.

The above steps represent a substantial shift in the way banks think about pricing, but there are a number of commercial, off-the-shelf solutions available in the market today to help make that transition. Banks have a range of options to suit them; while there is no one-size-fits-all solution, by devising a strong pricing strategy and reviewing the offerings of firms like Zafin, Nomis and Suntec, each bank will be able to find a vendor that meets their needs.