Varying price by segment or behaviors is a concept that has been mainstream for many years in lots of industries. The fact is that different people get different utility or value from a purchase and retailers long ago began to understand this. That is why a bag of M&Ms at a gas station may be 2x the price of the same bag in a grocery store, and 3x the price you might pay per bag in a warehouse store. The type of person who drives long distances and needs a snack in route, is generally not very price sensitive, but perhaps very hungry. Value warehouse buyers may have a shop that they are trying to stock or they may love M&Ms, but they have the discipline to buy them in bulk and bring them on car journeys.
Prior to Nomis, I led marketing for a Price Optimization software company that served the high tech and industrial manufacturing space serving customers that made things far more sophisticated than M&Ms and sold them into complex markets. There were microchip companies that had some products that had negative margins at par, and they needed to optimize price to extract pennies of profit from customers that saw more utility for specific purchases. They perhaps needed smaller quantities for a non-standard use or were very time sensitive for a critical project. There were Chemical companies that needed to optimize for where the supply of the chemicals was to limit transport costs thus effectively understanding and better communicating their cost to serve to their customers and realizing better prices. They also needed to ensure that customers met their volume commitments. This type of pricing based on a clear understanding of costs and an understanding of price sensitivity to determine customer prices is very well accepted in a variety of industries now. We take it for granted at the pump or online.
Banking has been a little slower to adopt this time-tested approach. One of the core reasons was that Banking is wrapped in layers of regulation as banking is so core to how free market economies work. Regulations protect consumers from wrongs that while possible, are thankfully no longer part of the daily reality in first world countries. At the core is the notion of fairness, which virtually everyone agrees with. Regardless of your race, sex, religion, or neighborhood – essentially all the indelible personal characteristics that define you - you should be able to access the same products and prices. Where banks are clearly within their right to vary price is where people have different sensitivities to price. One consumer may be motivated by convenience and want to have all of their accounts in one bank. Another may be a bargain hunter looking for the lowest interest rate loan or highest paying deposit account. A smart bank would reward the customer motivated by convenience with more convenience and the price sensitive customer with a better price thus giving both buyers what they want and ensuring they both stay on as customers.
Recently, the topic of price optimization got some attention on an analyst call for a major bank, where David Williamson from CIBC noted that the bank’s efforts in this area were a contributing factor to CIBC’s strong growth in Q1.
He stated in describing the core reasons behind double-digit growth:
The driver has really been the investment we’ve put into our front line, the investment we’ve put into some of our sensitivity analysis for pricing and some of the efforts we’ve done to get to deeper relationships, the Compass system. All those investments that have allowed us to… just be easier to deal with, to drive to deeper relationships, and that is what we are seeing in the volume growth I believe.”
Judging by the uptake we are seeing in our price optimization solutions as an age old business practice joins mainstream banking leveraging big data and advanced, SaaS-based analytics to make it happen, this approach has become a movement for the smartest banks.
Hold on to your M&Ms as a smarter way to price begins to change the fortunes of the banking industry favoring the most innovative banks that choose to know their customers' sensitivities best. Deeper relationships indeed, Mr. Williamson.