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This presentation describes our approach to developing disciplined pricing (for services) capabilities for banks
Citation preview
Developing Disciplined Pricing Capabilities For BanksOctober, 2010
mather:43 Woodstock StreetHistoric Roswell DistrictRoswell, GA 30075www.mathereconomics.com
Contents
About Us
Strategic Pricing For Banks
Contact Us
Who Are We?
Strategic Marketing And Applied Analytics Consulting Group
Copyright 2009 Mather LLC. All rights reserved.
Our Approach: Customer-focused, data and insights-driven with a bias towards action
Our Focus: Developing business, marketing and pricing strategies and tactics to maximize customer acquisition and Customer Lifetime Value
Our Consultants: A mix of PhD’s, marketers and strategic consultants from world-class companies
Our Strength: Making sense of complex data through advanced analytics and technology to support key business decisions
3
Recognized pricing experts in multiple industries
What Makes Us Different?
Proven and established advanced analytics capabilities to draw insights from large quantities of data
Extensive expertise in applying science to pricing Provide pricing analytics as an outsourced service for multiple
companies Experts at data capture, integration and visualization Experts at solution delivery in the enterprise space and cutting edge
technologies Deep understanding of how customer insights drive business
decisions Mix of marketers, consultants and PhD’s
Copyright 2009 Mather LLC. All rights reserved.
Our real world experience coupled with our analytics and technological capabilities make our recommendations actionable
4
We Have Worked With Best In Class Companies
Copyright 2009 Mather LLC. All rights reserved. 5
Our Capabilities
Copyright 2009 Mather LLC. All rights reserved. 6
Destination development
Customer driven strategic planning
Customer centric organizational alignment
TechnologyCustomer Driven Growth Strategy
Marketing Strategy & Capabilities
Data Analytics & Outsourcing
Portfolio strategy Value proposition
and brand architecture development
Marketing capabilities development
Consumer & store segmentation
Enterprise analytics Pricing analytics Test & learn protocol Customer Lifetime
ValueMarketing spend
effectiveness & media mix modeling
Next-best selling product, cross-sell & up-sell
Promotion & retail analytics
Basket analysis
Social media tracking & engagement methods & technologies
Technology requirements & planning
Data capture, storing, analytics & visualization technologies
Contents
About Us
Strategic Pricing For Banks
Contact Us
Financial-Overhaul Legislation Will Place Increased Pressure On Bank Revenues And Profitability
Consumer Financial Protection Bureau will increase banking regulation increasing pressure on profits
New bank regulation will eliminate billions of dollars in revenue to banks through the elimination of key fees
– Fees charged to merchants for debit-card transactions (interchange fees)
– Overdraft fees
Copyright 2009 Mather LLC. All rights reserved. 8
Banks will need to charge new fees to recover lost revenue
Banks Will Need To Charge Fees For Services That Customers Have Become Accustomed To Receiving For Free – All This In Tough Economic Times
Copyright 2009 Mather LLC. All rights reserved. 9
New fees to recover lost
revenue
What will be the net effect on the bank’s revenues and profitability?
How will existing and new customers react? What will be the net effect on
attrition and acquisition?
How will the Consumer Financial Protection Bureau and other regulators
react?
To Charge For New Fees And Ensure Maximum Revenue Increase And Minimum Customer Attrition Banks Need A Disciplined Pricing Approach
Pricing Best Practices
Scientific Modeling
Disciplined Pricing
Approach
Lift in revenues
Improved customer retention and acquisition
Increased Customer Satisfaction & Loyalty
Satisfied Consumer Financial Protection Bureau and Other
Regulators
Benefits to Banks
Copyright 2009 Mather LLC. All rights reserved. 10
The Impact of Developing A Disciplined Pricing Approach
$A disciplined approach to pricing will
often increase revenue 2-5%
Copyright 2009 Mather LLC. All rights reserved. 11
Pricing Approach
Disciplined Pricing
Measure & Track
Measure & Track
Review Regulatory
& Legal Constraints
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications On Pricing
Review Bank Strategy &
Implications On Pricing
Develop Preliminary
Pricing Tactics
Develop Preliminary
Pricing Tactics
Develop Pricing
Strategy
Develop Pricing
Strategy
Implement Pricing & Pricing
Guidelines
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Copyright 2009 Mather LLC. All rights reserved. 12
Pricing Approach – Phase 1. Review Bank Strategy & Implications On Pricing
Review the bank’s overall strategy to determine its implications on pricing strategy and tactics. What are the Bank’s growth objectives? What is the Bank’s positioning in the marketplace?
Efficient Pricing
Measure & Track
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications on Pricing
Develop Preliminary
Pricing Tactics
Develop Pricing Strategy
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Copyright 2009 Mather LLC. All rights reserved. 13
Pricing Strategies
Pricing Tactics
Costs Customers Competitors
Target high quality profitable customers
Increase geographic coverage 5% increase in revenues 4% reduction in customer attrition
Strategic Objectives
Illustrative
Review strategic objectives and that impact pricing
Pricing Approach – Phase 2. Review Regulatory & Legal Constraints
Review internal (e.g., organization, process, IT) and external regulatory, compliance and legal guidelines to determine specific constraints on pricing tactics and testing protocols
Efficient Pricing
Measure & Track
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications on Pricing
Develop Preliminary
Pricing Tactics
Develop Pricing Strategy
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Copyright 2009 Mather LLC. All rights reserved. 14
Pricing Strategies
Pricing Tactics
Costs Customers Competitors
Elimination of overdraft fees 30 day disclosure period for pricing
changes Limited IT infrastructure for efficient
pricing management Siloed pricing process
Strategic Objectives
Illustrative
Review regulatory environment and internal constraints that impact pricing and testing
Regulatory & Legal
Environment
Internal Constraints
Pricing Approach – Phase 3. Develop Pricing Strategy
Develop detailed pricing strategies – aligned with the bank’s strategic objectives -- for the bank’s overall portfolio and individual products. Develop the metrics and goals that will be used to measure the pricing effectiveness
Efficient Pricing
Measure & Track
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications on Pricing
Develop Preliminary
Pricing Tactics
Develop Pricing Strategy
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Copyright 2009 Mather LLC. All rights reserved. 15
Pricing Tactics
Costs Customers Competitors
Strategic Objectives
Define role of pricing within overall Bank and marketing strategy
Pricing Strategies
Develop pricing strategies, metrics & goals
Penetration
Neutral
Skimming
Rel
ativ
e P
rice
Economic ValueL H
HA B
C
Products &
Portfolio
Pricing Approach – Phase 4. Build Database And Pricing Model
Gather, cleanse and organize required internal and external data to build the database. Develop the pricing and survival model that will measure price elasticity, impact of pricing tactics on revenue and profitability, customer acquisition and pricing attrition.
Efficient Pricing
Measure & Track
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications on Pricing
Develop Preliminary
Pricing Tactics
Develop Pricing Strategy
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Seasonality & Trends
Competitor’s Prices
Economic Indicators
Market Factors
Regulatory Parameters
Customer & Account Data
Cost Data
Collect, organize and cleanse data & build database
dB
Build Pricing and Survival model
MetricsMetrics
Price Elasticity
Price Elasticity
Customer SegmentsCustomer Segments
ProfitabilityProfitabilityObjectivesObjectives
Products & Services
Products & Services
RegionsRegions
Competitive Reaction
Competitive Reaction
Pricing & Survival Model
Copyright 2009 Mather LLC. All rights reserved. 16
Pricing Approach – Phase 4. Build Database And Pricing Model (continued)
Calculate account attrition and segment profitability
Pricing & Survival Model
Copyright 2009 Mather LLC. All rights reserved. 17
sub_account wrtoff_amt plan_migrations ph_nbr_changes num_phones num_basic_srv days_active returns transfers reacts market_cd market_desc market_cluster200091831 0 0 0 1 1 1986 0 0 0 2 Chattanooga 3200104208 0 0 0 2 2 1916 0 0 0 2 Chattanooga 3200176551 0 0 0 1 1 1878 0 0 0 2 Chattanooga 3200239561 -36.21 0 0 1 1 2188 0 0 0 2 Chattanooga 3200256598 0 0 0 9 4 385 0 0 0 2 Chattanooga 3200268812 0 0 0 1 1 1741 0 0 0 2 Chattanooga 3200287141 -0.55 0 0 2 2 1644 0 0 0 2 Chattanooga 3
sub_account age income entrydate discondate hotlinedate prevhotdate ezpay winback male reactsind nbrchange startmonth200091831 52 4 3-Apr-99 9-Sep-04 14-Aug-04 14-Aug-04 0 0 1 0 0 4200104208 38 4 22-Apr-99 15-Mar-06 13-Sep-03 13-Sep-03 0 1 0 0 0 4200176551 62 7 19-Aug-99 9-Oct-04 13-Sep-04 13-Sep-04 1 0 0 0 0 8200239561 44 3 29-Nov-99 9-Jun-04 21-May-04 21-May-04 0 0 0 0 0 11200256598 60 3 31-Oct-05 20-Apr-06 31-Oct-05 31-Oct-05 1 0 1 0 0 12200268812 50 6 18-Dec-99 23-Sep-04 27-Aug-04 27-Aug-04 0 1 0 0 0 12200287141 80 5 24-Dec-99 24-Jun-04 14-Jun-04 14-Jun-04 1 0 0 0 0 12
sub_account residence jan06_tot_calls jan06_tot_mou adults_in_hh num_feat_codes deacts CLV 24 Mos Risk Score Loyalty Option200091831 13 1031 2325 2 1 0 508 24 None200104208 3 1216 3206 3 3 0 481 51 Handset200176551 4 593 4651 2 1 0 583 14 None200239561 3 141 192 1 2 0 399 72 Credit200256598 1 360 618 1 8 2 373 82 Fee Waiver200268812 9 840 1489 3 1 0 475 49 Credit200287141 5 860 2611 2 2 0 456 42 Credit
Customer Lifetime Value Prototype
Customer Profile CLV Calculation:New Customer (Y or N) Y Contract Revenue $517.05Acquisition Month 12 Fee Revenue $114.90Cricket Market 32 Handset Margin $36.88Handset Age 12 Acquisition ($100.00)Income tier 10 Direct OperatingAge 40 MOU Blended ($127.17)Average MOU 1,486 Call Center ($19.48)Average IVR 12 Payment Costs ($8.24)Gender (M or F) F Paper Billing Costs ($13.76)Unpaid balance $22 Credits ($49.96)EZPay status (Y or N) N Write-off Amount ($20.00)
Operating Costs Expected Lifetime Value $330.21MOU Blended $0.007Call Center $1.56Payment Costs $0.66 One-time Transaction MarginsPaper Billing Costs $1.10 Acquisition Month ($63.12)Credits per month $4.00 Disconnection ($20.00)Acquisition Costs $100.00 Total ($83.12)Handset Costs $112.33
Recurring Transaction MarginsRevenues Operating Month $37.50Handset Revenue $149.21 Expected Active-Months (2 yrs) 12.49Monthly Contract Price $45.00 Total $430.83Monthly Fee Revenue $10.00
Baseline and Adjusted Retention Curves
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
0 5 10 15 20 25
Months
Adjusted Baseline
Develop analytics by customer segment: attrition, price elasticity, CLV & profitability
$/pc
Output
Average Cost
Marginal Cost
Profit
Demand
Marginal Revenue
Price
Cost/PC
Determine price elasticity, marginal cost & profitability
Pricing Approach – Phase 5. Develop Preliminary Pricing Tactics
Develop detailed preliminary pricing tactics achieve strategic and pricing objectives within regulatory and internal constraints. Various pricing options will be considered and evaluated both qualitatively (pros & cons) and quantitatively (though the pricing model and test & refine protocol). Options include variations of: flat fee, two part pricing and tiered pricing, etc.
Efficient Pricing
Measure & Track
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications on Pricing
Develop Preliminary
Pricing Tactics
Develop Pricing Strategy
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Review pros and cons of different pricing approaches
Copyright 2009 Mather LLC. All rights reserved. 18
P
Q
Price
Quantity
Revenue = P x Q
P0
Price
Quantity
P1
P2
P3
P4
Q4 Q3 Q2 Q1Q0
Revenue = Pi x Q ii =0
N
Flat Pricing Segmented Pricing
Incremental value
Flat Fee
Two Part Pricing
Tiered Pricing
Pricing Approach Description Structure
Single account maintenance fee independent of usage
Includes a flat maintenance fee plus a usage (per transaction fee) fee
Variable fee depending on usage level
$24 per month
$10 per month+
• Per transaction feeo $5/trans for 1 -10 transactions
o $3/trans for 11 –20 transaction
o $1/trans for 21+ transactions
Fee depending on:o Number of transactionso Banking activityo Minimum $ amounto # of services in useo Bundling
Develop detailed preliminary pricing tactics
Pricing Approach – Phase 6. Test & Refine Pricing Tactics
Test preliminary pricing tactics to measure customer reaction, acquisition and attrition. Testing is performed with carefully planned and chosen test & control groups. Pricing tactics are adjusted according to test results.
Efficient Pricing
Measure & Track
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications on Pricing
Develop Preliminary
Pricing Tactics
Develop Pricing Strategy
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Test different pricing scenarios
Adjust and refine pricing tactics
Copyright 2009 Mather LLC. All rights reserved. 19
80.00%82.00%84.00%86.00%88.00%90.00%92.00%94.00%96.00%98.00%
100.00%
Out of Area Retention by Date Cohort
11/30 target
11/30 control
12/7 target
12/7 control
12/14 target
12/14 control
12/21 target
12/21 control
1/25 target
80.00%82.00%84.00%86.00%88.00%90.00%92.00%94.00%96.00%98.00%
100.00%
North Coastal Retention by Date Cohort
11/30 target
11/30 control
12/7 target
12/7 control
12/14 target
12/14 control
12/21 target
12/21 control
1/25 target
80.00%82.00%84.00%86.00%88.00%90.00%92.00%94.00%96.00%98.00%
100.00%
North Retention by Date Cohort
11/30 target
11/30 control
12/7 target
12/7 control
12/14 target
12/14 control
12/21 target
12/21 control
1/25 target
90.00%91.00%92.00%93.00%94.00%95.00%96.00%97.00%98.00%99.00%
100.00%
Overall North Coastal Retention
Target
Control90.00%91.00%92.00%93.00%94.00%95.00%96.00%97.00%98.00%99.00%
100.00%
Overall North Retention
Target
Control90.00%91.00%92.00%93.00%94.00%95.00%96.00%97.00%98.00%99.00%
100.00%
Overall East Retention
Target
Control
Flat Fee
Two Part Pricing
Tiered Pricing
Pricing Approach Description Structure
Single account maintenance fee independent of usage
Includes a flat maintenance fee plus a usage (per transaction fee) fee
Variable fee depending on usage level
$24 per month
$10 per month+
• Per transaction feeo $5/trans for 1 -10 transactions
o $3/trans for 11 –20 transaction
o $1/trans for 21+ transactions
Fee depending on:o Number of transactionso Banking activityo Minimum $ amounto # of services in useo Bundling
Pricing Approach – Phase 7. Implement Pricing & Pricing Guidelines
Roll out new pricing schemes and guideline, implement required organizational, capabilities, process and IT changes, coordinate with legal and compliance, and activate marketing/communications.
Efficient Pricing
Measure & Track
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications on Pricing
Develop Preliminary
Pricing Tactics
Develop Pricing Strategy
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Copyright 2009 Mather LLC. All rights reserved. 20
Implement Pricing
Process and IT
VP Strategic Marketing & Communications
Director Marketing Communications
Director Insights & Analytics
Category Directors
Marketing Managers
SVP Operations
VP Operations West
VP Operations South
Operations Managers
Operations Managers
Marketing Managers
Strategy
Local Market Strategy
Communications with Operations
Organization, decision rights & capabilities
Flat Fee
Two Part Pricing
Tiered Pricing
Pricing Approach Description Structure
Single account maintenance fee independent of usage
Includes a flat maintenance fee plus a usage (per transaction fee) fee
Variable fee depending on usage level
$24 per month
$10 per month+
• Per transaction feeo $5/trans for 1 -10 transactions
o $3/trans for 11 –20 transaction
o $1/trans for 21+ transactions
Fee depending on:o Number of transactionso Banking activityo Minimum $ amounto # of services in useo Bundling
Pricing scheme & guidelines
Marketing & Communications
Sales/Channel
Pricing Management
Changeprice?
Notifystake-holders
BusinessStrategy
RevisePricing
Materials
$$
Finance Marketing
YES ProposedNewPrice
ApprovedNewPrice
ValidateCustomer
Pricing
UpdatePricing
Records
RequestQuote
Customer
CustomerrejectsQuote1
Quote 1.a(modified w/o
approval)
Customeraccepts
Quote1.a
SeniorManagement
CostsMarginProfits
PricingStrategy
Manufacturing
InventoryLogistics
CustomerACME Inc.
CompetitionSuppliers
PricingProducts
SegmentCredit Rating
FreightRebates
Internal Factors
Quote/OrderInvoice Price
Invoice Pay to$
Payment (Net)List Price Database
External Factors
Price Change Process
Quote 1 (notapproved)
Quote 1(approved)
Start!
Analysis
Approval Process
Pricing Approach – Phase 8. Measure & Track
Measure results against key goals (e.g., lift in revenue, profitability, customer attrition & acquisition). Analyze variance and determine key drivers. Adjust pricing tactics accordingly. Continuously track and measure results.
Efficient Pricing
Measure & Track
Review Regulatory
& Legal Constraints
Build Database
And Pricing Model
Test & Refine Pricing Tactics
Review Bank Strategy &
Implications on Pricing
Develop Preliminary
Pricing Tactics
Develop Pricing Strategy
Implement Pricing & Pricing
Guidelines
1
2
3
4
5
6
7
8
Copyright 2009 Mather LLC. All rights reserved. 21
-
50,000
100,000
150,000
200,000
250,000
300,000
New
Co
nn
ecti
on
s (p
er
week)
Campaign C
Campaign B
Campaign A
Campaign I
Campaign G
Campaign F
Campaign E
Campaign D
Handset Subsidies
Base
Actual
Curr Month YTD 2006 Curr Month YTD
D Actual-Goal Actual Actual D '07-'06 D '07-'06
L1 Procedures (eyes) 1% 8463 71,135 -15% 21%Consults (patients) -91% 513 5,573 10% 4%Leads (patients) -77% 2,566 26,055 12% 9%
Avg. Patient Pay 2,413$ 2,372$ 1.1% 1.8%Avg. Discount
L-C Conversion 20% 21% -2% 162%C-P Conversion 917% 709% -23% -89%L-P Conversion 183% 152% -24% -70%No Show/Cancel
Leads % Consults % Proc % Leads % Consults % Proc % % Leads % Cons % Cons % Proc Leads Cons Proc Leads Cons Proc
DTC 1,633 57% 290 51% 296 4% 1,703 54% 279 46% 380 4% 51% 46% 49% 40% 65% 56% 51% -8% -4% -47%OD/MD 1,084 38% 228 40% 343 5% 1,178 38% 297 49% 474 5% 43% 48% 46% 49% 27% 35% 40% 10% 6% -36%CAP/TPP 133 5% 42 7% 27 0% 193 6% 32 5% 13 0% 4% 5% 4% 2% 5% 2% 2% -1% 5% -2%TruVision 24 1% 2 0% 0 0% 37 1% 3 0% 0 0% 1% 1% 0% 0% 5% 7% 7% -4% -6% -7%
Curr Month YTD 2006 Curr Month YTD
D Actual-Budget Actual Actual D '07-'06 D '07-'06
Center Marketing -29% $893,968 $7,552,540 97% 99%OD/MD $1,333,991 $17,733,763 -73% -81%
CM Spend/Proc $106 $106 169% 64%OD/MD Spend/Proc $158 $249 1298% -85%
Total Company (National)
$102$174 $362 -21%
$2,203 $38 5650.0% $38$285 $187 52.4%
2066%
$14,997,877$15,883,616 $360,500 4306.0% $3,294,113
Actual D Curr-Prev Budget Actual
$3,330,498 $2,051,813 -62% $1,757,241 16.8% $19,409,557
Marketing Spend2007 2006 2007-2006
Current Month Previous Month YTD
Budget Actual D Actual-Budget
54% 49%3% 4%0% 1%
% %
% Proc % Leads
43% 46%
101.0%29% 27% 2% 27% 29% 0.7%
139.0% 167.3% -28.3% 45.0% 38%
Sources2007 YTD
Current Month Previous Month 2007 2006
708.8% 854.0% -145.2% 81.0% 70.3% 638.5%19.6% 19.6% 0.0%
$1,847 32%
56.0% 54.0% -34.4%
$2,441 $2,420 0.9% 2,414$
5,773 11,563 2,882 -75% 3,125 -8% 124,417 28,426
D I-Fusion I Average
Current Month Previous Month YTD
Goal Actual D Actual-Goal Actual D Curr-Prev Goal
9408 -23% 85,000 86,189 6,241 565 -91% 612 -8% 67,147
Objectives2007 2006 2007-2006
Current Month I-Fusion I Average
Actual
7,900 7,209 -9%
Measure relevant results
Visualize results vs. key goals – Analyze variances
Flat Fee
Two Part Pricing
Tiered Pricing
Pricing Approach Description Structure
Single account maintenance fee independent of usage
Includes a flat maintenance fee plus a usage (per transaction fee) fee
Variable fee depending on usage level
$24 per month
$10 per month+
• Per transaction feeo $5/trans for 1 -10 transactions
o $3/trans for 11 –20 transaction
o $1/trans for 21+ transactions
Fee depending on:o Number of transactionso Banking activityo Minimum $ amounto # of services in useo Bundling
Variance in: Revenues Profitability Attrition Acquisition
Adjust tactics
Contents
About Us
Strategic Pricing For Banks
Contact Us
404-395-4937matt@mathereconomics.com
Contact Us
mather:43 Woodstock StreetHistoric Roswell DistrictRoswell, GA 30075770-993-4111 mainwww.mathereconomics.com
Matt Lindsay, Ph.D. Daniel Fischer404-543-3272daniel@matherLLC.com
David Weinberger770-649-0472david@mathereconomics.com
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