By Hrishi Rajadhyaksha, Maximilian Biesenbach and Megan Beattie.
The private banking and wealth management sector had been facing margin pressures even before the investment landscape was turned upside down by the recent crisis. The requirement from MIFiD II that banks disclose precise details of their fee structures, as well as communicate total fee payments each year, has been leading to decreasing fee income. As the novel coronavirus has created ripples across equity and bond markets, trading volumes in certain pockets like ‘early investors’ have been quite healthy. However, wealth managers that charge transaction-based fees (for example, on advisory and execution only accounts) cannot rely on regular transactional activity to boost revenues in longer market downturns. Against this backdrop, the recipe for successful monetisation strategies is not obvious. Rather than reinventing the wheel, there is a lot that wealth managers can learn from other industries.
Wealth managers are likely to be under pressure as clients become increasingly price sensitive to management fees in declining markets. This price sensitivity will only be compounded by the uncertain and unprecedented economic environment brought on by the spread of COVID-19. Are lower revenues the new status quo, or is there a way for wealth managers to mitigate this? To tackle this question, there are five highly relevant monetisation lessons wealth managers can learn from five different industries:
- Differentiate! One size doesn’t fit all
Lessons from the music industry
Have you been listening to your ‘Work from Home’ Spotify playlist on repeat lately? Spotify serves as a clear ‘best practice’ example of how to effectively cater to different customer needs.
Besides epitomising both the ‘freemium’ and subscription business models, Spotify does one additional thing really well – they understand that not all of their customer are the same. Spotify clearly position three different price points to cater to the diversity of their target audience.
Music-lovers pay the magical price point of £9.99 a month for ad-free listening. Additionally, the ‘Family’ bundle gives you access to up to 6 accounts and child-friendly features at £14.99 a month. Eligible students meanwhile can pay a lower price point of £4.99 a month.
By offering feature-differentiated bundles of Spotify Premium along with the ‘free’ version, Spotify appeals to differing customer needs and captures the additional willingness to pay of these customer segments.
What can wealth managers learn from the music industry?
Wealth managers tend to offer ‘one-size fits all’ banking solutions; however, just as the music enthusiast will be willing to pay up, in order to hear his or her favourite song on demand, more sophisticated investors or those with very particular needs would likely be willing to pay a bit more for a tailored investment offering. For clients who trade infrequently and require little to no advice, wealth managers might consider offering a ‘Basic’ solution. For clients who require more frequent conversations and guidance a ‘Premium’ investment option would be preferable. Finally, a sophisticated trader or an investor with a complex portfolio of securities who requires daily monitoring and regular advice might be willing to pay for a high-touch or ‘Advanced’ service.
Offering different levels of service in wealth management helps to tap into different customer needs. Tiered service levels help to mitigate draw downs or cancellation of services in times of uncertainty and ensure a more steady flow of revenues—as customers will have already self-selected into services levels they deem valuable. Tiering also presents the customer ‘exit offers’ which contribute to improved retention outcomes.
- The ‘how’ trumps the ‘what’
Lessons from the logistics industry
For those of us who have been ‘locked down’ and bulk-buying non-perishables online, it has been hard not to think—delivery companies must be cashing in! The pricing model of delivery companies provides another interesting case study on a monetisation best practice: how you charge is far more important than what you charge.
Back in the early 2000s, there was a TV delivery company that charged on a fixed fee per TV basis. Over time, as TVs got larger, the company could fit fewer items in their trucks at a time; this led to a steady decline in revenues. If you look at any price model of delivery companies today, the standard metric is a fee per kilogram. Thus, as the size and weight of TVs grow, as do company revenues. The logistics industry goes to show that the metric, or how a company charges, may ultimately carry far more weight, than the price level charged.
What can wealth managers learn from the logistics industry?
Considering whether the price metric being used is suitable for the customer base presents an opportunity for wealth managers. For instance, if most customers are buy-and-hold investors, charging with a per-trade fee model is likely not the right monetisation metric. Instead an all-in fee model on total assets invested might make most sense. This will help to guard against potential downturns in the market, as wealth managers can rely on recurring revenue of an all-in fee.
Looking closely at your customer’s trading behaviour, including trading volumes, asset classes and AuM, is crucial in determining the right metric. Additionally, the metric needs to be carefully calibrated. The market has seen a surge in trading volume due to shocks across asset classes in the recent global sell-off. Having the right price tiers to cover different types of trades helps monetise investment activity more efficiently under a variety of conditions.
- Customers are irrational: price for this
Lessons from the retail industry
When you finally have to leave the house and venture out to the supermarket to pick up the essentials –you might also be tempted to purchase a bottle of wine. You may even end up spending more on the bottle than you originally intended. Don’t feel bad: this is likely because supermarkets understand the irrationality which drives customer purchase decisions and use this in the way they display their products.
In one study conducted at a US supermarket, the retailer displayed two bottles of wine: one at the price of $10 and one at $20. The result? Only 20% of customers purchased the $20 bottle. In another test, the supermarket added a ‘dummy’ bottle of wine at $30, with the $20 bottle displayed between the $10 and $30 options. In this test, 40% of customers went for the $20 middle option. This is called the ‘rule of three’ or ‘compromise effect’, where customers are most likely to choose the middle option, as the cheapest option is likely to be seen as low quality, while the most expensive option might be seen as a waste of money. This psychological pricing tactic is used across the retail space — and may be the reason you spent slightly more on that bottle of wine than you originally intended.
What can wealth managers learn from the retail industry?
The use of behavioural pricing techniques in product monetisation is under- appreciated in the investment industry. Evidence from the ‘compromise effect’ suggests that offering three options might be optimal. The below product architecture is an example of how a wealth manager might implement this in practice (particularly for smaller, ‘execution-only’ investors): the limited nature of the Standard Investor option serves to nudge customers to the Frequent Investor middle option, which offers an additional trade included per month. The Premium Investor option has the double-benefit of both framing the middle option as preferable in terms of price, while also catering to the specific needs of more sophisticated investors within your customer base.
- (Price) communication is key
Lessons from the entertainment industry
As we all hunker down at home and look for ways to entertain ourselves—it is hard to avoid turning on Netflix. Not only does Netflix offer reprieve from boredom, it also provides more than one best practice in monetisation. In addition to offering differentiated products through its Basic, Standard and Premium streaming packages (Lesson 1), it also demonstrates best practice price communication.
The monthly subscription model of Netflix has in many ways revolutionised the way customers pay, conditioning them to think in terms of ‘monthly fees’. Rather than charging customers close to £110 per year, Netflix charges £8.99 per month. The smaller, more frequent payments are more ‘manageable’ from the customer perspective, and also allow the customer to feel as though they have more control over their spending on a monthly – rather than annual — basis.
What can wealth managers learn from the entertainment industry?
The typical millennial investor will likely have Netflix, Spotify and potentially myriad other monthly subscription accounts. Communicating the prices of financial products along the same lines as these services will likely resonate. For example instead of charging nominal account fees annually, merely changing the model to charge on a quarterly or monthly basis serves to deliver more optimal outcomes.
Wealth managers may need to charge service fees to maintain investment accounts, however sometimes price tags may be as high as $5,000. A $1,250 quarterly charge instead may make the price more palatable for customers. This reduces the ‘pain of paying’ and can also help dial down ‘sticker shocks’ for worried customers in the current investment landscape.
- Keep calm…be fair…and carry on
Lessons from the software industry
We live in unprecedented times — there are limits on socialisation, and mandatory requirements to work from home. The business world relies now more than ever on services provided by the likes of Zoom and Skype to stay connected and remain productive.
Imagine however, that suddenly, another unprecedented announcement was made: All software companies have decided to change their prices and will charge based on the colour of their client’s logos. Clients with blue logos pay less than clients with red logos, but more than those with green logos. This simply would not be fair, and would not make sense in customer sales conversations.
Customers must be charged prices which they perceive as fair. What software companies do much better than wealth managers is value selling. In the case of Zoom, this means clearly articulating the value that customers gain from their product– for example, enabling remote working in these trying times. Such value is then charged for in a transparent and fair manner, typically on a per month, per host basis.
What can wealth managers learn from the software industry?
Customers must deem their prices to be in line with the value they receive through investment services. This means training sales reps on how to properly communicate value being delivered to clients. It is paramount in today’s world to tie clearly different prices to truly different levels of service, and on a metric which is consistent.
Having sales collateral with clearly articulated services, tied to clear prices, can help guide sales conversations. Beyond that, wealth managers can keep track of pricing decisions by systematically tracking their clients’ revenues and discounts given, to understand where the company historically has been under- or overpriced. Identifying KPIs and reporting out on these metrics consistently can help sales teams see historic trends, align price to value, and ensure customers feel they have received a fair price for the service they are getting. As long as they feel they are being treated fairly, customers will stick with your business—even when the investment landscape gets rocky.
Balancing uncertainty with certainty
Consumers and businesses alike face an uncertain future. The spread of coronavirus has led to an unprecedented series of events: the UK pound has hit a 30-year low, workers are adjusting to remote working-styles, while governments across the globe are introducing fiscal stimulus packages to protect the future of industries—from airlines to local retailers. All such activity will inevitably put increasing pressure on wealth managers’ margins, which have already been squeezed by regulation.
In the face of this uncertainty, it is useful to look upon tried and true methods from across industries, to learn lessons of best practices in monetisation. Although the value propositions are very different to financial services, drawing inspiration from other industries can help wealth mangers refine their offerings and pricing strategies and help them weather the economic uncertainty.
Ultimately, innovation in monetisation will help make the difference. That, and washing your hands.