product and pricing psychology for sme lending · product and pricing psychology for ... new york,...

www.simon-kucher.com

Banking Growth Strategy Forum 2016

Wei Ke, PhDPartnerSimon-Kucher & Partners

Product and pricing psychology for SME lending

May 2016

New York office17 State St. 37th FloorNew York, NY [email protected]


Simon-Kucher & Partners at a glance

Strategy

Sales

Marketing

Pricing

Growth and competitive strategies Product portfolio

(re-)design Pricing excellence Customer relationship and

customer value management Sales strategies and sales

channel optimization

Global presence

Best consultancy in marketing and sales

>3,000 projects in the last 3 years

World leader in giving advice to companies on howto price their products

Pricing strategy specialists

The world’s leading pricing consultancy

In pricing you offer something nobody else does

BusinessWeek The Economist

Professor Peter DruckerThe Wall Street Journal

World leader in pricing

Source: manager magazin survey of top managers in Germany, August 2007 and 2011/IMB

Source: brand eins Thema/Statista survey of approx. 1,500 partners and project leaders from consulting firms and approx. 1,500 C-level managers from German companies, May 2014 and 2015

Marketing and sales Marketing and pricing Sales and CRM

brand eins Thema manager magazin

Simon-Kucher & Partners

Boston Consulting Group

McKinsey & Company

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Boston Consulting Group

McKinsey & Company


Boston Consulting Group...McKinsey & Company

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Madrid MilanMountain View Munich New York Paris San Francisco Santiago de Chile São PauloSingapore Sydney TokyoTorontoViennaWarsawZurich

32 offices, 900 consultants, $240m in 2015 revenue

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Agenda for today’s session

Decision psychology at the point-of-sale

Client buying behavior for SME lending products

Implications for SME lending product and pricing strategy

Phot

o: C

OLO

URBO

X/An

drey

-Kuz

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Most people are unwilling to invest their limited time to do mental calculations. Banks should target individual’s "System 1" for highest accessibility and impact

The importance of communication to attract interest: "System 1 vs. System 2"

75 x 25 = ?

What your mind did:

Saw the baby

Noticed his expression

Linked it to previous experiences

Understood he is about to burst into tears

Imagined what would happen next

What you did:

Identified the task

Activated mathematical abilities

Used short-term memory

Operated iteratively

Used limited capacities of concentration

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Source: Simon-Kucher & Partners; Süddeutsche Zeitung; Ke, 2009

Best practice: Retailers have mastered the art of "system 1" based offers and sales processes

High-margin items are placed near the cashiers and at the eye level

Fast-moving items are placed in the back so customers have to pass all other shelves

Discounted items are placed in high-traffic areas and on temporary display stands to signal they will be gone soon

Complementary products are placed together

Price anchors are used to increase willingness to pay for complemen-tary items

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Source: Simon-Kucher & Partners research

You thought it was difficult to sell a commodity…

Own Brand$0.12

Staedtler$1.60

Faber Castell$3.00

"Perfect Pencil"$57.00

5 design awards Anti-break system Prices 25x own brand Staedtler / Faber market share c. 45%

And we thought it was tough to

defend prices for banking services

…!

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What about the ultimate commodity-water…

$7/liter $100,000/liter$0.80/liter$0.02/liter

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Choice psychology can help reinforce the value perception of a line-up of products

Scenario A (Group 1) Scenario B (Group 2)

68% 32% 67% 7%26%

Chardonnay, California 2011

Pinot Grigio, Italy 2009

Chardonnay, California 2011

Pinot Grigio, Italy 2009

Chablis, France 2006

Natural tendency towards the middle choiceA higher price anchor increases willingness to pay / reduces price sensitivity

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Source: Simon-Kucher & Partners project experience

Dan Ariely, leading behavioral economist from Duke University, studied the following phenomenon, which was observed in a Simon-Kucher project for the Economist magazine

Offer structure impacts price perception

Group 1

Option Price ($) Choice (%)

Economist.com subscription only 59 68%

Print + economist.com subscription 125 32%

Average revenue per subscriber $80

Group 2

Option Price ($) Choice (%)

Economist.com subscription only 59 16%

Print only subscription 125 0%

Print + economist.com subscription 125 84%

Average revenue per subscriber $114

Subscriptions: Which subscription option would you like to get?The Economist

Clever offer structures can highlight the presence of a "deal"

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Observed behavioral biases on small business lending

Elasticity response to mathematically equivalent price metrics

Sensitivity to primary vs. secondary price metrics

Nonlinear pricing vs. line usage

Reference price vs. promotions

Versioning and pricing by value

Choice set presentation vs. client decision at the point-of-purchase

Looking beyond product silos

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Different elasticity response to mathematically equivalent price metrics

0%

10%

20%

30%

40%

50%

60%

13% 15% 17% 19% 21% 23% 25%

Take-up (APR) Take-up (payment amount)

Example: $50,000 loan / 1-year term

Mathematically equivalent

But impossible to equate the metrics via mental math

Result: Vastly different elasticity response

$8,449 $9,224 $10,023 $10,844 $11,686 $12,546 $13,422

Take-up

RateMonthly payment

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Source: Simon-Kucher & Partners – US Retail & SME Survey 2015

Different price sensitivity to primary vs. secondary price metrics

Upfront fee + $100Rate as is

Upfront fee as isRate + 130 bps

Example: $50,000 loan / 1-year term

Hyperbolic discounting: We are more sensitive to upfront fees than rate in purchase decisions

Payment $ is easier to understand than rate %

Result: Very different loan profitability outcome!

Equivalent take-up probability

Less profitable loan More profitable loan

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137%

43%

12%

-3% -13% -19% -23% -27% -29% -31%500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000


* Price BC €412, Price per kilometre €0.20.Source: Simon-Kucher & Partners project experience; Deutsche Bahn

The BahnCard: Pay an annual fee and receive a 50% discount on all rail travel for one year

Discount on paper: 50% Realized discount from actual behavior: 29%

Approx. 2,050 km Total km/year Total km/year

Total

Full fare = 100

€412

Break-even point*

With BahnCard

Without BahnCard

We tend to overestimate product usage

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Source: Simon-Kucher & Partners – US Retail & SME Survey 2015

Nonlinear pricing influences line usage

Deal effect: Rate discount at the expense of increased upfront fee

Result: Client commitment and increased line usage!

Upfront fee as isRate as is

Example: $50,000 line

Lower line usage Higher line usage

Equivalent take-up probability

Upfront fee + $100Rate – 130 bps

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Application to small business lines of credit

Used part of the credit line: Finance charge is based on usage

Today: Credit line pricing

Unused part of the credit line: In general, free to all clients Value to the clients: peace of mind,

liquidity buffer, etc. However, there is cost to the bank in

originating a credit line (whether used or not)

The entire credit line: Clients will now pay a small fixed fee to

accessing the entire credit line at discount rate, whether the line is used or not

Used part of the credit line: Finance charge is based on usage, but

at a lower interest rate than before

Tomorrow: Liquidity access fee

Significant increase in line usageSignificant increase in take-up

Present today and tomorrow’s pricing model side by side to illustrate the difference at the point-of-sale

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Reference price: Disney’s Mr. Fan

How much does this product cost at a Disney park?

Too expensive? Why would you feel it’s too expensive? Past purchase experience? A similar product at Walmart? Guesses based on the materials

and construct of the product?

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Problem: Reference price is not a constant and can be updated by "sustained price communication"

Reference rate

Offered rate

Period 1 Period 2

Old reference rate

Offered rate

New reference rate

High-low pricing tactic helps to reset reference rate periodically (e.g. each generation of new iPhones)

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Differentiations of small business lending products focus primarily on pricing structure today

Large Bank 1 Large Bank 2 Disruptor 1 Disruptor 2 Disruptor 3

Max loan or line amount $100,000 $50,000 $100,000 $300,000 $100,000

Term Revolving LoC 5 year term 6 or 12 Months 5 year term 6 months

Rate range Prime + 1.75% toPrime + 9.75%

Prime + 1.75% toPrime + 6.50% 32% to 108% APR 8% to 32% APR 13.99% - 36% APR

Additional fees

$150 on approval ($250 for lines over $25,000) $150 annually

beginning the second year and beyond

$150 on approval ($250 for lines over $25,000) $150 annually

beginning the second year and beyond

1.5%-13.5% feewhen client draw on the line

0.99%-6.99% origination fee 1-2% fee when

client draw on the line

$20 monthly maintenance fee

Discount & promotions N/A N/A N/A N/A

$20/mo fee is waived for 6mos if client draw $5k or more in the first 5 days of opening account

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low highlow

Feature leader/filler matrix of a loan

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Niche leadersNiche fillers

Perceived feature utility

1214

56789

1011121314151617181920212223

1620

2223

21 19

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1

2

high

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LeadersFillers

6

7

810

11

13

15 5

9

Convenience Rate security

Rewards


Source: Simon-Kucher & Partners project experience; certain data disguised to protect client confidentiality

Loans do not have to be a commodity: versioning and pricing by value5

Project Example

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Too many choices = walking away

24 Choices 6 Choices

After trying 24 different jams, how many customers actually bought one?

Buy No buy

97%3%

After trying 6 different jams, how many customers actually bought one?

Buy No buy

70%30%

Too many choices lead to "choice overload," which reduces purchase intent

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Choice set impacts client decision

Most lenders today voluntarily list all credit-approved products and terms (strict interpretation of UDAAP)

If instead we can select 2-3 most relevant options for the client for discussion first and then go to the expanded list later as needed…

Lower take-up due to choice overload Higher take-up

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Behavioral applications beyond the lending product silo: Give clients a reason to "cross-buy" into other product verticals

Build a product universe

Use the same differentiation logic to version and price out all products

Set incentives for the clients to voluntarily expand and deepen the banking relationship

Are you making it fun for your customers to bank with you? What would make your customers voluntarily "cross-buy" into other products?

Project Example

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www.simon-kucher.com

New York office17 State St. 37th FloorNew York, NY 100091-212-537-0770

product and pricing psychology for sme lending · product and pricing psychology for ... new york,...

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