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Monetizing Mobile: How to determine willingness-to-pay

Professional Pricing Society

April 23rd, 2015

Wei Ke, PartnerDavid Chung, Director

New York office

17 State Street, 37th FloorNew York, NY 10004, USATel. +1 212 537 0770

Your speakers for today

Specialist in strategic issues at the marketing-operations interface

Led engagements for institutions in North America and Europe on price optimization, customer pricing psychology, quantitative marketing models, and risk management

Frequently been published in leading financial services journals, including Bank Accounting & Finance, BAI Banking Strategies, and the American Banker, on both sides of the Atlantic

Ph.D. in Decision, Risk, and Operations from Columbia Business School, and B.Sc. in Electrical Engineering & Applied Mathematics, summa cum laude, from Columbia University in the City of New York

Expert on B2B pricing strategies, price model design, client segmentation, data design and analysis, and price implementation

Led international projects for clients in the US, Canada, UK, and Europe.

Published in leading financial services journals, such as BAI Banking Strategies and conducted research projects and written white papers on approaches for pricing innovative products in financial services

MBA from Duke University Fuqua School in Business specializing in Marketing Strategy and Finance, and a BS in Chemical Engineering & Economics from Columbia University in the City of New York

David Chung

DirectorNew York


Wei Ke

PartnerNew York

2

Agenda

Pricing Innovations Strategically

Case Study: Monetizing Mobile Banking Innovations

Questions?

Monetizing Mobile: How to determine willingness-to-pay 3

Pricing as integrated process in product development


Product/Service

or

Crucial aspects of design process Common errors

Aligning internal goals

Understanding customer needs

Defining feature hierarchies

Finding the right pricing method

Eliciting / Estimating willingness to pay

Not understanding the customers

Implementing the “wrong” features

Being compared to the “wrong” offerings

Not exhausting the customers’ willingness to pay

Monetization strategy (= Pricing)

“The most successful innovations are built to be monetized”


Mobile / Online innovations fail due to …



… the wrong Pricing Model for the right Product.

Launched in 2009

Billing-management software

Adapted “freemium”-strategy without considering willingness-to-pay for feature bundles

Chargify:

Customers were using the service but were unwilling to upgrade to the premium bundle.

▹ Abandoned freemium and introduced paywall strategy.

▹ Profitable since 2012.

… the wrong Pricing Model for the wrong Product.

Launched in 1998

Online retail platform for pet-supplies

Adapted below-cost pricing to increase market share

Goal of cross- / up-selling of premium pet-supplies

Pets.com:

Demand projections inaccurate.

Customers were not interested in premium products.

▹ Went bankrupt in second fiscal year. $300 million of investment capital vanished.

Google Answers:

… the wrong Product

Launched in 2002

Online knowledge market: Users can ask questions that professional researchers answer.

Customer-determined pricing: The customer names a price that a researcher can opt to accept or ignore.

Customers were not interested in sophisticated answers by professional researchers and had no willingness-to-pay.

▹ Service was shut down in 2006.

5

Successful Pricing: Uber


Uber’s most important innovation is the way it prices its services.

MIT Technology Review


Other Dynamic Pricing Success Stories: Capturing willingness-to-pay via dynamic pricing has proven to be successful before.

Willingness-to-Pay: Uber employs efficient price gouging via dynamic pricing and captures their customers’ full willingness-to-pay.

Understanding Customer Needs: Through Uber’s surge pricing approach, supply is generated when the customers need it most, namely during high-demand phases.

6

Successful Pricing: Apple


16GB 32GB 64GB

Wi-Fi $499 $599 $699

Wi-Fi + 3G $629 $729 $829


Example

Simple pricing schedule, based on only two levers: flash storage + WiFi

Cost to Apple is minimal to add these features

BUT, Apple is pricing based on willingness to pay rather than cost

… they know their customers are most willing to pay for storage and connectivity

7

Agenda



Questions?


We see three broad categories of mobile banking services that institutions can offer.

What is mobile banking?

Basic: allow customers to monitor fraudulent activities through their mobile phone.

Advanced: enable customers to use their mobile phone for complex actions, such negotiating credit increases to support short-term borrowing needs.

Interactive services

Allow customers to use their mobile phone to transfer money between accounts, pay vendors or conduct peer to peer transactions, for example.

Transactional services

Provide basic facts such as accessing account information and finding branch or ATM locations.

Informational services

Definition / ExamplesService category


These services can be categorized into the value they create and level of technology required

Cu

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Low HighValue created for small businesses

Basic interactive services

Advanced interactive services




Informational and transactional services utilize mobile banking technology that is widely available today

Interactive services represent the next generation of mobile banking features

Small businesses value transactional services more than informational services

Advanced interactive services are set to create more value for small businesses compared to basic interactive features

10

… and are not tapping into small businesses’ willingness to pay for mobile banking services.

Financial institutions currently give core services away for free…

Free service Paid-for service

The business benefit for mobile banking is commonly seen as lowering the cost-to-serve by migrating customers

away from branch and call center channels.

Most mobile banking services are currently free to

customers.


Non-traditional brands offer paid-for banking services and

are winning ‘virtual’ market share, indicating that

customers are prepared to pay for digital banking

services.

However, the increasing number of free services may shift customer expectations.

11

http://www.citigroup.com/citi/homepage/

http://www.citigroup.com/citi/homepage/

… this leads to mobile banking solutions that are not oriented on creating value and not generating revenue.

Furthermore, financial institutions often blindly follow industry trends in terms of package design…


Packages are dominated by basic services, for which small businesses are unwilling to pay

Little thought goes into which features should be offered in order to meet the needs of different small businesses

Pricing is an afterthought when bringing a new mobile banking solution to market

12

First Quarter 2014, N=147

We surveyed relevant decision-makers and used a comprehensive range of statistical methods

Over 75% of respondents manage all day-to-day banking for their business

Statistical methods used

0%

10%

20%

30%

40%

50%

60%

70%

80%

Manage allof the day-

to-daybanking

Jointlymanage theday-to-day

banking

Managemost of theday-to-day

banking

Managesome of theday-to-day

banking

Nevermanage anyof the day-

to-daybanking

Factor analysis

Cluster analysis

Total Unduplicated Reach and Frequency (TURF) analysis

Survey topics:

Current mobile banking usage

Attitudes towards mobile banking

Mobile banking feature preferences

Most desired payment metric for mobile banking services

Willingness to pay for mobile banking services


Four-step framework for defining and pricing winning mobile solutions

Understandcustomer needs

Segment small businesses according to banking behaviors, understand their different needs, and prioritize features that are of value to them

How are small business clients different in their mobile usage needs and behaviors?


1

What features are important and of value to small businesses?

Design mobile value proposition

Create a mobile banking solution to meet the identified needs of small businesses

2

What combination of features will reach the greatest number of small business customers?

Should differentiated packages be offered to target different "types" of small businesses?

Identify preferences for the pricing structure and metric by which to charge customers

Determinehow to price

3

What is the optimal price metric?

Understand small businesses’ willingness to pay for features and determine the optimal price level or range

Set the rightprice levels

4

What is the optimal price point or range for the offering?

14


Over 60% of respondents currently use mobile banking services, and there is potential for this to increase

Current mobile banking usage1

Over 80% of small

businesses either use mobile banking now or show potential to use

Weekly use – 34%

Infrequent use – 33%

Never used mobile – 33%

over 45%

of small businesses that never used mobile banking services, expressed that they do have a need for these services or that the services would be nice to have


Six clusters of small businesses1

Clusters

Willing to pay for mobile

banking

Mobile banking

savvy

Confident & mobile

banking savvy

Relationship driven

Financially confident

Not engaged

Be

ha

vio

r g

rou

ps

Embrace mobile banking

Willing to pay for mobile banking

Relationship driven

Cash flow confident

Population % 7% 22% 7% 24% 17% 23%

1 2 3 4 5 6


= above average value, = average, = below average value

16

First quarter 2014, n = 147

Usage of mobile banking by small business cluster1

1. Willing to pay for mobile banking

2. Mobile banking savvy

3. Confident and mobile banking savvy

4. Relationship driven

5. Financially confident

6. Not engaged

0% 20% 40% 60% 80% 100%

Weekly user Infrequent user Never used

Response percentage

Behaviors that small businesses exhibit in relation to mobile banking reflect the current mobile banking usage of each cluster

Over 70% of small businesses in cluster 1, who indicate that they have a strong willingness-to-pay for mobile banking services, are weekly users of mobile banking services

Over 60% of small businesses in cluster 2, who embrace the concept of mobile banking, are regular users of mobile banking services, with only 5% having never used mobile banking before



Informational and transactional services are regarded as the most important by small businesses.

Overall most important mobile banking features

0% 20% 40% 60% 80% 100%

% respondents who regard a feature as somewhat or very important

Informational Transactional Advanced interactiveBasic interactive

Top 10 most important mobile banking features

1

Accessing account info (balances, recent transactions, statements)

Receiving alerts (fraudulent activities, low balance, reached overdraft limit, payment due dates)

Monitoring fraudulent activities (e.g. confirming unusual transactions)

Depositing a check

Reporting/blocking lost/stolen cards

Reaching your institution when you need to, such as calling customer service or placing an inquiry

Transferring money between accounts to optimize your savings portfolio or to pay off a loan

Receiving transaction verification and advanced warning (e.g. identification of a due bill payment and confirmation for the

payment being received)

Receiving service guarantees and knowing how you are protected when you use mobile banking

Checking due dates for payments/bills


* A small business is defined as being reached by a mobile banking offering if they regarded at least one service within one the feature category as “very important”First Quarter 2014, N=147

TURF analysis was used to identify the proportion of the population that would be reached offering the top three services within each service category.

Feature importance by mobile banking category1

Informational services Transactional services

77% of all

respondents would be reached using

these top three features

Accessing account information, such as balances, recent transactions and statements

60%

Receiving service guarantees and knowing how you are protected when you use mobile banking

4%

Receiving alerts (e.g. fraudulent activities, low balance, reaching overdraft limit, payment due dates, etc.)

13%

73% of all

respondents would be reached using

these top three features

Depositing a check

50%

Transferring money between accounts to optimize your savings portfolio or pay off a loan

6%

Reporting/blocking lost/stolen cards

18%


There are three high level options for designing mobile banking solutions and based on our study we suggest a versioning and packaging approach for small business mobile banking solutions.

Options for designing a mobile value proposition2


Transaction pricing Versioning and packaging Mixed pricing

Every-day usage

Occa-sionalusage

Emer-gencyusage

Inter-active

Infor-mational

Trans-actional

Mobile Banking Services

Free

Low Medium High

Low-plus

Medium-plus

High-plus

Mobile Banking Usage

Package 1

Package 2

Package 3

Inter-active

Infor-mational

Trans-actional


Free

Price1

Price2


Pure package

Pure trans-action

Package + Trans-action

Inter-active

Infor-mational

Trans-actional


Free

Price1

Service oriented

price Core fee plus add-

on pricingPrice

2

Service oriented

price-plus


Mass

Premier

Include price premium on

bespoke VCA Price 1 plus price premium

incorporated into bespoke

VCA fee

Price 2 plus price premium

incorporated into bespoke

VCA fee

Bespoke Checking Account packages that include mobile

20

Under a versioning and packaging approach, packages are made up of individual modules which reflect the different categories of mobile banking service available.

Lead features in a modular mobile banking offering2

Level 3 packageLevel 2 packageLevel 1 package

Informational services Accessing account information Receiving alerts Receiving service guarantees and knowing

when you are protected

Advanced interactive services Receiving transaction verification and

advanced warning Capturing and storing receipts Requesting for payment flexibility for loans,

mortgages or credit cards

Basic interactive services Monitoring fraudulent activities Reaching your institution when you need to Receiving location based offers

Transactional services Depositing a check Reporting/blocking lost/stolen cards Transferring money between accounts to

optimize your savings portfolio or to pay off a loan


M $ = Monthly fee for unlimited transactions; F $ = Fixed amount per transaction

As an example, we see that for informational features, the preferred payment method is a monthly fee for unlimited transactions.

Payment preferences by cluster

Monetizing Mobile Banking for Small Business Customers

3



banking

Mobile banking

savvy

Confident & mobile

banking savvy

Relationship driven


Not engaged

Accessing account

informationM $ M $ M $ M $ F $ M $

Receiving alerts (e.g.

fraudulent activities, low

balance)

M $ M $ M $ M $ F $ M $

Checking due dates for

payments/billsM $ M $ M $ M $ F $ M $

Changing your ATM/Debit

PINsM $ M $ M $ M $ F $ M $ / F $

… … … … … … …

1 2 3 4 5 6

22

Overall, across all mobile banking feature categories, a monthly payment for unlimited transactions was the dominant payment metric.

Payment preferences across clusters

% of features for which "monthly payment for unlimited transactions" was the dominant payment metric

3

Service category


banking

Mobile banking

savvy

Confident & mobile

banking savvy

Relationship driven


Not engaged

Informational services 100% 100% 82% 100% 9% 100%

Transactional services 91% 64% 64% 82% 9% 64%

Basic interactive service 67% 67% 67% 67% 33% 100%


100% 60% 80% 80% 40% 100%

1 2 3 4 5 6


One hypothesis is to set the cheapest package for free to ensure it has some appeal to all small businesses and then to tier the Level 2 and Level 3 package prices according to willingness-to-pay.

Price levels for a modular mobile banking offering

Level 3 package


WTP for top 3 services: $15







Level 2 package







Level 1 package





Informational services Accessing account information - $5 Receiving alerts - $5 Receiving service guarantees and knowing

when you are protected - $5

Advanced interactive services Receiving transaction verification and

advanced warning - $5 Capturing and storing receipts - $5 Requesting for payment flexibility for loans,

mortgages or credit cards - $10

Basic interactive services Monitoring fraudulent activities - $5 Reaching your institution when you need to -

$1 Receiving location based offers - $3

Transactional services Depositing a check - $5 Reporting/blocking lost/stolen cards - $3 Transferring money between accounts to

optimize your savings portfolio or to pay off a loan - $5

4

Price suggestion: Free Price suggestion: $13 Price suggestion: $33

WTP potential: $24 WTP potential: $37 WTP potential: $57


Summary


Understandcustomer needs

How are small business clients different in their mobile usage needs and behaviors?

1

What features are important and of value to small businesses?

Design mobile value proposition

2

What combination of features will reach the greatest number of small business customers?

Should differentiated packages be offered to target different "types" of small businesses?

Determinehow to price

3

What is the optimal price metric?

Set the rightprice levels

4

What is the optimal price point or range for the offering?

25

Agenda



Questions?


Any additional

questions?


* Average for 2007 and 2011, maximum 500; Source: Manager Magazine (Germany)

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www.simon-kucher.com

Wei Ke, Partner

[email protected]

David Chung, Director

[email protected]

New York office

17 State Street, 37th FloorNew York, NY 10004, USATel. +1 212 5370 770

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Thank You!

mailto:[email protected]

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