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Relationship Pricing - The Key to Valuing Your Customers?

Guest Author

Blog By: Akshaya Kapoor, Senior Director, Product Strategy, Oracle Financial Services

This is the third and final blog in a series relating to a joint study between Oracle and Efma, which led to the production of a White Paper: Making Innovation Pay. An important conclusion of the study was that a move towards revenue management is essential - and that as part of this, relationship pricing is one of the key elements in achieving sustainable, long-term profitability and revenue assurance from innovation projects.

The report comments: “For many banks, profit margins are still below pre-crisis levels. The solution lies in the development of innovative, personalised offers combined with other revenue-enhancing initiatives such as relationship pricing.” Pricing is one of the ‘Four Ps’ that Oracle believes are essential for building a digital enterprise (and which equally apply to successful innovation) - Product, Price, People and Place. As we talked in the last blog, it’s all about offering the right product, right place, right price and at right time.

McKinsey says “Successful banks can adopt a sophisticated pricing strategy that can add 6 to 15 percent to the bank’s revenue, deepen relationships with valuable corporate clients, and encourage performance improvements throughout the organization”

Adopting an effective pricing strategy

Traditionally, banks have opted for a product-based pricing approach. Strategy should cater from one time buyers with a “Click-buy-bye” offer to regular buyers with dynamic pricing that help & incentivize customers with a “click-buy-buy” offer.  However, in recent years they have been gradually moving towards a more relationship-based pricing approach, along with subscription models, discounts and product bundles - but progress in this area is still slow. Another recent White Paper by Oracle and Efma, ‘Responding to change – how are banks using information and pricing strategies to boost profitability?’, suggests that only 36% of the banks surveyed have adopted true relationship pricing.

The paper goes on to say that a poor pricing strategy will ultimately lead to lower profits and that ideally, relationship-based pricing should go hand-in-hand with innovation. This was confirmed by the current study, which observes that a relationship-based pricing strategy can make a real difference to a bank’s ability to respond to change.

Relationship pricing involves offering customers more favourable prices on a particular service because of the customer’s purchase of other solutions from the bank. For example, a customer with a bank account might be given a more favourable mortgage rate. The ease with which a bank can set these more personalised prices can be helped by a further strategy – the aggregation of accounts. This enables the bank to see the total customer relationship, which in turn enables it to offer the customer discounted prices as a reward for their loyalty in different areas.

Applying a relationship-based pricing strategy

One of the difficulties of adopting a relationship-based approach to pricing is that it can be difficult to assess the true value of the relationship with the customer. The key to effective relationship pricing is that it should be applied holistically – and this in turn means that banks need a better understanding of their customers.

To understand a customer fully, a bank needs to able to look at different aspects of customer behaviour so that it can recognise, anticipate and influence it through personalised pricing. Banks have a huge amount of customer information – but they need to choose and use the right data so that they can run analytical models that will enable them to develop the right pricing strategies. Finally, they also need to use dynamic pricing and agile strategies that are aligned to critical customer events and milestones (such as buying a house or car or getting married).

Unfortunately, most banks that are moving towards a relationship-based pricing approach only apply this strategy to specific products or occasions. This type of piece-meal approach is unlikely to have a lasting effect. One example quoted in the report is that of a person who is both a retail customer and also a small business owner. If the bank is able to view the total relationship, it can start to set prices that reflect the true value of the customer.

The report sums this up by saying: “One reason why some of the innovative programmes don’t pay off is because they are designed without paying attention to relationship pricing. The programme is designed for the experience but not for the pricing. So it might involve a good idea but it doesn’t make money because the bank hasn’t identified how to price it effectively.”

The White Paper concludes that pricing represents a missed opportunity for banks – but there is still time to grasp this opportunity and develop a relationship-based pricing strategy that is also aligned with their innovation strategy. In this way, they will be able to start to make good progress on the arduous but worthwhile road to sustainable profitability.

To see the full report on Making Innovation Pay, please visit

 

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