Dynamic Pricing for Finance?

In financial services, dynamic pricing is predicated on the individual customer relationship with the bank, as an expression of the client relationship.

It is comprised of two parts: relationship pricing and pricing execution.

Because this type of pricing strategy is customer oriented, not product oriented, true dynamic pricing requires a fundamental shift in how banks have looked at overall customer profitability.

A shift to a dynamic pricing strategy means no longer looking at individual products as revenue drivers, but at the individual customer’s portfolio of products and services as the revenue driver, in both retail and corporate banking.

Relationship Pricing 

Good pricing is a tool that encourages customer stickiness – it’s about customer acquisition, retention and satisfaction – while balancing profitability by finding the price that reflects the customer’s perception of value for the service, their price sensitivity and elasticity.

This is pricing optimization, which takes into account holistic data analytics, both external market and competitive data, and customer behavior data, to get at the optimal price point for that individual customer.

A number of trends can be summarized below. 

1.Dynamic Pricing is the rapid adjustment of prices to demand conditions based on real-time data.

Good examples of this includes airlines which price their tickets according to the remaining seat availability. Increasingly, dynamic pricing is also being applied to retail sector to improve inventory and supply-chain management, using both on-line and off-lines. 

2.Behavioral pricing is a form of price discrimination in which different prices are charged based on the usage and/or buying history.

The area where it has the most potential is for online purchases, as collecting and evaluating large volumes of data are easier via the channel.  Also, for both dynamic pricing and behavioral pricing, price adjustments are increasingly being linked with targeted marketing campaigns for specific customer groups.

One potential disadvantage of this approach is a lack of consistency and thus reliability in the customer's perception and the fact that aggressive promotional offers can often be regarded as a nuisance. 

3.Loyalty pricing can be considered a special type of price differentiation based on behavior.

This is widespread in retailing, for typically the repeated purchasing of certain products from the same provider or a purchase above a certain value is rewarded with more favorable terms or bonuses. 

At the same time, the approaches described above offer opportunities for faster adjustment to competitors via dynamic pricing, better price and service differentiation according to differing customer requirements and local market conditions, and thus the potential boosting of profitability and customer satisfaction. 

Pricing Execution

Pricing execution is the other half of the equation, and whereas most banks already have adopted pricing optimization strategies – at the product level – how they can execute those strategies in their current systems is a bigger challenge, and dynamic doesn’t describe most of the current systems.

Dynamic means that the price of the product or bundle can be changed in real time in the internal IT systems, from the CRM all the way through to the billing system, and requires only a single data entry point for that change to occur in all systems.

That means any changes to a customer bundle, or a price change due to market forces (a competitor’s promotional offering, for example), can be made and updated in all the systems in real-time. Both the pricing strategy and execution play a crucial role in the success!

Therefore, there is some way to go to achieve the real dynamic pricing for Finance. 

Edited by AI Analytics Inc.