Pricing: The 'Value Meal' Approach: Now More Than Ever Banks Need to Consider a New Pricing Paradigm-Multiproduct and Bundling Pricing or Relationship Pricing-To Boost Customer Relationships and Offset Fee-Revenue Declines

By Baumgarten, Jens; Bushnell, Oliver et al. | ABA Bank Marketing, June 2010 | Go to article overview

Pricing: The 'Value Meal' Approach: Now More Than Ever Banks Need to Consider a New Pricing Paradigm-Multiproduct and Bundling Pricing or Relationship Pricing-To Boost Customer Relationships and Offset Fee-Revenue Declines


Baumgarten, Jens, Bushnell, Oliver, Vidal, David, ABA Bank Marketing


BANKS CURRENTLY FIND THEMSELVES under double pressure: from consumer groups that challenge bank fees and from falling revenue stemming in part from regulations restricting the use of overdraft fees.

While it will be tempting for banks to simply raise unregulated fees (bounced check fees, for example) or implement basic annual fees for currently free services (checking and savings accounts), this is sure to draw greater ire from customers and will do nothing to rebuild consumer confidence and increase needed volumes. In order to increase volumes through deeper and broader customer relationships, banks must develop product offers and pricing schemes that foster their customer relationships and increase customer loyalty.

Thus now is a good time to review the pricing schemes and introduce innovative ones such as multiproduct pricing, bundling or relationship pricing.

Reward for increased use of bank products

While simple price cuts make customers happy in the short term, they are profit killers; the added volume they spur rarely compensates for the lower unit-contribution margins. Innovative pricing schemes are the only means through which profits can be increased and customer loyalty simultaneously strengthened. The common philosophy of these pricing approaches is to reward customers more as they increase their use of the bank's products and services, creating a win-win situation for both the customer and the bank.

One key requirement for such schemes is to be simple and transparent so that the customer clearly recognizes the monetary advantage of a stronger relationship with the bank. This transparency will also make significant headway towards complying with new regulations requiring the simplification of bank product fee and rate structures. When appropriate, multiple schemes can be combined.

Here is a review of some of the innovative pricing approaches that can help to reach the goal of better differentiated prices, thus better matching customers' willingness-to-pay:

1. Multiproduct pricing/bundling

In multiproduct pricing, customers are presented with monetary incentives that promote product consumption. A typical example from outside fincancial services comes from telecommunications, where consumers receive a substantial discount on the price of a cell phone if they sign a contract with a network provider. In banking, bundling is becoming more common in the category of mortgages. HSBC Canada, for example, offers decreased annual mortgage rates for customers who add a banking product (for example, a checking account) or a deposit of at least a certain amount in new funds to an HSBC investment or deposit account. The more products customers purchase, the further the rate on their mortgage falls.

The bundling of product or service components into a package is a special form of multiproduct pricing. Among typical examples of bundling, McDonald's combines a hamburger, french fries and soda to make an "Extra Value Meal." Microsoft sells Windows together with countless other applications, and your local coffee shop most likely sells a cup of coffee and a donut for one bundled price.

Bundling could be an especially useful tactic to encourage customers to opt in to overdraft protection services. The bank might offer customers the option of overdraft protection at a fixed fee--with even lower fees if the customer also signs up for certain other accounts (such as savings, brokerage, CDs and so forth). This way, cross-selling and certain product bundles would be promoted while simultaneously limiting the number of clients who opt out of full overdraft protection.

Many banks have made considerable progress to better understand the products or features that should be represented in a package or bundle. However, they usually have limited knowledge of customers' value perception for different products or features, which provide the best insight into the optimal pricing of the bundle. …

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