Banks Explore 'Price Optimization'
TowerGroup has announced a new report titled "Price Optimization: A Practical Guide to a Retail Bank Implementation" that finds that the "strategies and procedures used by most banks today to set prices remain too simplistic. Banks are still relying heavily on manual processes and so are prone to errors, and they often exclude consideration of a critical factor -- the consumer's price elasticity of demand."
The approaches to pricing commonly found within many banks are problematic for a number of reasons. Many banks are "hit or miss" in their ability to accurately forecast customer demand for bank products and services, resulting in an inaccurate projection of institutional cash flow. Also, an allowance for employee discretion in the modification of pricing is frequently "baked into" pricing policies and procedures, without mandating oversight or providing accountability. Furthermore, financial institutions often fail to explore customers' behavioral thresholds relative to prices - that is, where customers might be more flexible about rates, or where a price shift might trigger a negative response.
In its new research report, TowerGroup explores the challenges banks and other retail financial institutions face when it comes to pricing of their products and services. Titled "Price Optimization: A Practical Guide to a Retail Bank Implementation" -- and co-authored by Bobbie Britting, a senior analyst in the TowerGroup Consumer Lending practice, and Kathleen Khirallah, managing director and practice leader of the Banking practice -- the report outlines the introduction of advanced analytics and demand modeling to the pricing process. Price optimization, a growing trend in the retail banking space, involves a philosophical change from a product-based orientation to one focused on the customer -- shifting the emphasis from the price at which the institution will sell the product to the price the customer is willing to pay to buy the product.
In the report, Britting and Khirallah examine the factors critical to successfully implementing price optimization, including:
- Fostering cross-functional teamwork to facilitate improved pricing strategies
- Introducing and formalizing business rules and constraints into the pricing process
- Automating manual processes wherever possible for operational transparency and accuracy
- Instituting rigorous exception pricing oversight and governance give an institution the ability to expand in the customer-based realm
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