mather disciplined pricing approach for banking summary

Developing Disciplined Pricing Capabilities For BanksOctober, 2010

mather:43 Woodstock StreetHistoric Roswell DistrictRoswell, GA 30075www.mathereconomics.com

http://www.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

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Our Capabilities


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


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


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


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


The Impact of Developing A Disciplined Pricing Approach

$A disciplined approach to pricing will

often increase revenue 2-5%


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


Review Bank Strategy &

Implications On Pricing


Implications On Pricing

Develop Preliminary

Pricing Tactics

Develop Preliminary

Pricing Tactics

Develop Pricing

Strategy

Develop Pricing

Strategy

Implement Pricing & Pricing

Guidelines


Guidelines

1

2

3

4

5

6

7

8


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



Implications on Pricing

Develop Preliminary

Pricing Tactics

Develop Pricing Strategy


Guidelines

1

2

3

4

5

6

7

8


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




Develop Preliminary

Pricing Tactics



Guidelines

1

2

3

4

5

6

7

8


Pricing Strategies

Pricing Tactics


Elimination of overdraft fees 30 day disclosure period for pricing

changes Limited IT infrastructure for efficient

pricing management Siloed pricing process


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




Develop Preliminary

Pricing Tactics



Guidelines

1

2

3

4

5

6

7

8


Pricing Tactics



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




Develop Preliminary

Pricing Tactics



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


Pricing Approach – Phase 4. Build Database And Pricing Model (continued)

Calculate account attrition and segment profitability

Pricing & Survival Model


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




Develop Preliminary

Pricing Tactics



Guidelines

1

2

3

4

5

6

7

8

Review pros and cons of different pricing approaches


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




Develop Preliminary

Pricing Tactics



Guidelines

1

2

3

4

5

6

7

8

Test different pricing scenarios

Adjust and refine pricing tactics


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





$24 per month

$10 per month+





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




Develop Preliminary

Pricing Tactics



Guidelines

1

2

3

4

5

6

7

8


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





$24 per month

$10 per month+





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




Develop Preliminary

Pricing Tactics



Guidelines

1

2

3

4

5

6

7

8


-

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





$24 per month

$10 per month+





Variance in: Revenues Profitability Attrition Acquisition

Adjust tactics

Contents

About Us


Contact Us

[email protected]

Contact Us

mather:43 Woodstock StreetHistoric Roswell DistrictRoswell, GA 30075770-993-4111 mainwww.mathereconomics.com

Matt Lindsay, Ph.D. Daniel [email protected]

David [email protected]

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mather disciplined pricing approach for banking summary

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strategic pricing

preliminary pricing

pricing approach phase

pricing model test

recognized pricing experts

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