The Pricing Game

In today's competitive world of retail banking, pricing can usually be a differentiating factor and make or break a sale. With most of the pricing becoming deregulated, banks are now faced with a challenge on how to fix the right pricing for their products and services. If the pricing is expensive, there is a risk of customers moving away to competition. If the pricing is cheap, there is a real threat to profitability.

The pricing dilemma has no easy answers. It is a complicated question which is interlinked with a variety of factors. Should one price a product based on costs or competition? Should one be aligned to market and try to control or manage costs? Does service levels and customer convenience have any bearing with price? Should one consider differential pricing for different customer segments or geographies? The list of questions goes on and on..

Traditional marginal costing principles teach us that it is better to price on marginal or incremental cost basis. That means, the fixed costs which do not change with volume need not be included in cost for pricing purposes. Hence, only the cost that is directly linked to providing the service should be factored while computing costs. This, however, is easier said than done especially in organisations which have multi-products, multi-locations etc.

The easiest method would be to look at what competition is offering and be priced somewhere near that. One would have to, of course, consider factors that help in getting a premium or giving a discount (like special services, flexibility, convenience etc.). While deciding the pricing, one should also consider the likely business volumes that one is expecting to determine whether this business will be profitable in the medium term.

Smart companies realize that even if the first transaction with a customer is not profitable due to lower than expected pricing, one can always look for ways & means of becoming profitable by either cross selling multiple products to the same customer, increasing the tenure of the loan to spread the acquisition costs, giving top up loans, making extra income on delayed payments (if any), selling fee based products to own customer etc. All of this is possible if the service levels are high and the customer is delighted with the services.

To summarize, in an excessively competitive market, one does not have too much flexibility on pricing. It will have to be dictated by market forces and the only factor that one can control is the costs. Each business should be constantly looking at ways & means of becoming & remaining profitable by managing costs and looking at other means of increasing revenue with the customers who have been on boarded.