pricing in finanacial services unit-3

8/14/2019 Pricing in Finanacial Services Unit-3

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P R IC IN G IN F IN A N A C IA L

S E R V IC E S


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CHALLENGES IN PRICING

FINANCIAL SERVICESPrices are often Multi-dimensional

Elusive measures of quality

Economic forcesPoor consumer Knowledge

Difficulty in determining customer profitability

Indeterminable Costs

Conflicts of interest


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Approaches To pricing

Financial ServicesCost-based pricing

Parity Pricing

Value-based pricingRegulation based pricing


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COST-BASED PRICINGPrice=Cost*(1+Markup)

Higher markup for higher profits and vice versa

LimitationsUse of average cost unfair

Challenging of pinpointing fixed cost

Total lack of consideration for the level of

consumer


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PARITY PRICINGSet price in response to competitors pricing

Establish the primary competitor(MarketLeader)

Suitable for Price changes and new financialservices introduction

Parity pricing =Factor*Key Competitors Price

Factor = Our Price Last Year/ Key competitors

price last year


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CONTINUEDAdvantages:

Results in market stability

Escalate into subsequent price cutsEliminates independent managing of ones own

price.


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VALUE BASED PRICINGCost based and parity based may result in

prices that are either above what consumersare willing to pay or below consumer price

expectations.Former Case- loss of Market Share

Latter Case- Loss in profits

Principle behind this-based on what customersperceive to be the value of the service.

Price = Base Price + Rupee Value of additionalfeatures offered by our service.


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. continuedAverage premium price =Rs.5000/year

Company provides unique service which may merita higher price

Company has been ranked as top insurerThe name of the company is well recognized

24/7 customer service

Through customer service quantify the rupee

valueSuch a survey may reveal

For top insurer-Rs 1000 Brand name -Rs750 Customer Service-Rs750


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. continuedPrice=Rs 5000+Rs1000+Rs750+Rs750

=7500Rs

In Credit Card- Fraud Protection Activities

In Insurance Company- for its well recognizedbrand name which gives us a piece of mind

Commercial Bank-Knowledgeable bank tellers


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BENEFITS OF VALUE BASED

PRICINGRecognize Source of revenue

Ensure all possible feature of the service isaccounted for

Pave the way for new product developmentand added features

Eliminate service feature which deplete value

and result in customer satisfactionResearch shows this approach is the most

connected to customer feeling about thecompanys offering


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REGULATION BASED

PRICINGRegulators play a significant role in

determining price

Regulators might mandate price levels, andfinancial service providers have very limitedinput in determining the prices to be charged


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DETERMINING WHICH PRICE

TO USEHighly competitive environment- Parity Pricing

Unique features of financial Services- Value-based pricing

The selection of final price may involvemanagerial judgment and the numericderivation of the price.


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CATEGORY SPECIFIC

PRICINGUnique aspects of pricing for several popular

categories of financial services

In particular, tactics and approaches used inpricing

Credit Products

Savings Products

Investments and brokerage services

Insurance Products


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PRICING CREDIT

PRODUCTSCredit products have 2 fundamental

characteristics

First relates to whether the lending activity is

collateralized or notSecond dimension , credit can be extended to

a customer in either revolving or non-revolving form.

In addition to collateral and the revolvingnature, 2 factors influence this Performance Risk

Interest Rate


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PRICING SAVINGS

PRODUCTResponsibility of keeping the money safe

The first approach to savings product istransaction-based

The second approach is to encouragecustomers to place large amounts


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Pricing Brokerage and

Investment ServicesBrokerage business is divided into 2 categories

Full-commission Brokers charge high price

Discount Brokers charge less price

Brokers have underlying incentives

Encourage customers to carry out a highnumber of securities- churning


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PRICING INSURANCE

PRODUCTSAccurate estimation of the probability of the

event being insured

These probabilities are often captured in what

is referred to as actuarial Tables

Underwriting profits

pricing in finanacial services unit-3

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