3 Reasons for Price Optimization in Banking Besides Profit Improvement

3 Reasons for Price Optimization in Banking Besides Profit Improvement

Anyone who has been following bank price optimization technology since 2003 knows that the science was originally deployed to squeeze out additional profitability in portfolios that wouldn’t otherwise been seen. The idea was to use price sensitivity of customers to split them into sensitive and insensitive customers and trade off. Raise prices on the insensitive customers and gain profit. Lower prices on sensitive customers and gain volume. The loss of volume in the first group is offset by the gain in the second group. Profit increases overall. Seems like a great idea, right? Well, just using price sensitivity to arbitrarily increase profits hasn’t been a great motivator for the technology. Banks are worried about a lot of other things: regulatory pressure, customer engagement, share of wallet, etc. In fact, a recent survey of US community bankers by KPMG showed 57% of revenue-growth initiatives are around operational areas like cost reduction, divestitures, operational improvement, and M&A. Only 13% of initiatives are around business model changes, like price optimization. So, is price optimization dead? No. Think about what price optimization is. It’s using statistics to predict how your customers will behave when you change price – and then leveraging that information to be profitable. Basically, it’s what you should be doing anyways. But you still have to come up with a business case for the technology. I’d like to give you three reasons that correlate to three of Jim Marous’ top 10 retail banking trends. You can see the full list here. 1. Increased Competition (#3 on Jim’s Top 10 List) When competitors change their prices, the relevant question is: “now...