In this month’s post, John Shortt reflects on the ongoing importance of price optimization to our company and customers as we broaden our offerings to support relationship pricing and discretion and deal management pricing.
Nomis Solutions has historically been regarded as a company with price optimization technology – and, truthfully, we’re pretty good at what we do.
While price optimization will always be at the core of what we do, the industry is changing and we’re moving forward with technologies to provide our customers with robust ways to evaluate the economics and profitability of every deal based on a variety of factors.
KNOWING THE VALUE OF CUSTOMER RELATIONSHIPS AND LOYALTY
While there is a lot to gain when optimizing each deal on a one-by-one basis, it is becoming increasingly important for banks to understand the overall value of the customer relationship. To take pricing and optimization a step further, banks will need to understand their relationship with that individual customer and incorporate that value into their overall pricing strategy to make it a win-win for all parties.
Current customers will be loyal to your brand and therefore less price-sensitive and therefore, may accept a higher rate. At the same time, the customer also generates revenue for you from their other products. Analytics can help you understand the likelihood and cost of the worse-case scenario: The customer isn’t happy with the terms you’re offering and opts to take their banking relationship elsewhere and not just for a current deal but their checking accounts, savings accounts, investments, and everything else.
This is why relationships need to be considered as part of the pricing decision. As we begin to take the full relationship into account when optimizing, we really start to see where this can be a win-win for everyone.
FINDING THE CUSTOMER’S SWEET SPOT
Of course, there are many external factors to consider in pricing, too. For example, a competitor may be running a special interest rate on CDs, and you may want to try match it or offer something similar.
However, to be truly effective, you need to understand the potential impact of a marketing campaign like this to your business by conducting A/B testing (also known as split testing). Seeing the performance of Group A (no offer) to Group B (offer) helps you to understand your portfolio and identify ways to quantify these impacts, understand which customers reacted to the offer and the how big the reaction was. Those tests will help to improve the underlying business intelligence models and improve value generated from optimization.
There is also value in identifying customers' reactions to offers. Customers are more than just data points, and that’s something your front-line staff will notice and be able to act on. Because they work directly with customers, they can often tell by their reaction or questions how price sensitive they are. Your frontline team should be empowered with analytics to negotiate with customers who otherwise may walk without going into an exception process.
This flexible and data-driven approach lets you find the “sweet spot” for each customer so you can optimize pricing based on their price sensitivity and allow front-line staff to offer the rates needed to close the deal.
MEASURING THE IMPACT OF DEALS AND DISCOUNTS
Nomis Solutions already offers technology for transaction and account optimization. But what we’ve developed more recently is the ability to factor in the entire customer relationship, putting all the information associated with a customer in one centralized place to help you understand the overall relationship value of a customer and better optimize pricing in terms of lifetime profitability.
So, you might start with the optimized price but then offer a discount based on how important it is to retain that customer. Then, you add the capability to place controls around discretion to make sure the front-line bankers aren't just giving away everything to every customer – that they're being more targeted with discounts.
I think it really levels up how the front line is operating from this kind of blindly offering a discount to win over a customer. Instead, they are using technology to get information, so they understand how to approach each negotiation.
Used properly, discretion and deal management analytics enhance the value of optimization and person-to-person pricing. For example, if you have five people come in for a mortgage and, using our tools, you know 80% of people will accept the rate. That’s not a bad win rate coming out of the gate. But when a discretion algorithm is applied properly, you can empower your frontline team to secure the other 20%.
Of course, not all customers need discretion as part of price optimization right now, but when those customers walk into your doors or connect with you online, rest assured we’re already moving forward to support the capabilities you’ll need to compete and win their business.
WE’LL KEEP INNOVATING
Price optimization will always be a powerful core technology from Nomis Solutions, but with additional integrated products you’ll be able to target customers more precisely with pricing that ensures you stay profitable.
John Shortt is the VP of Professional Services and has been a part of the professional services team at Nomis Solutions for the past four years. Previously, he was Manager in the Data and Analytics teams at PwC Canada and PwC Ireland.