Updated: Jul 6
BDO iLab survey reveals that 83% of bankers agree effective use of bank analytics is critical to competitive pricing, and 65% say pricing will be more dynamic, personalized, and flexible than it is today.
Unfortunately, when it comes to an understanding the importance of pricing, many marketing, sales, and finance managers lack the tools to deploy successfully effective and integrated Price-to-Profitability process.
Financial institutions are littered with KPIs, dashboards, graphs, charts, and even "war rooms" with figures for revenue, sales volume, and, at best, some margins added at the country or product level. However, drawing meaningful conclusions requires digging deeper to optimize profitability and return on tangible equity.
Bank Analytics allows you to perform some of the following analyzes to reveal the potential that has not materialized until now:
1.- Customer analytics
Customer Lifetime Value
Before going into advanced analytics models, a fundamental analysis carried out by very few financial institutions is to evaluate clients according to their annual income using the average margin or discount for all their clients. Typically, higher revenue is expected to lead to a higher discount (and lower margin). But in reality, this is what we very often find:
A . Many banks aren't giving their customers discounts and other benefits correctly. As a result, the most influential customers are constantly aware and angry about how less important customers obtain more benefits.
B. The best pricing strategies avoid risks, organizing customer segments to create benefits for both parties. Customer-centric techniques balance financial product mix, and volume consumed where prices maximize profitability.
2.- Price alternatives
It is not fair to compare all customers equally. However, a deeper analysis by comparing similar transactions and margin levels help to define price alternatives to optimize customer value.
In many banks, 30% to 50% margin deviation is usually a norm and not the exception. However, measuring revenue and cost components makes it easy to understand how to move below-average margin clients to a higher margin level, optimize prices, and renegotiate low-risk contracts.
3.- Products and sub-products
Beyond the classification between collection and placement products, it is necessary to know the client's behavior to prioritize the value proposition according to their needs.
The classification of primary products and sub-products allows price redefinition by comparing where customers pay more and less attention—allowing better foundations for revenue management and profitability optimization.
4.- Discount frequency - Do you take customer discounts for granted?
Many sales teams do not consider the full range of discounts and extra benefits they can give their customers. You will be amazed at how often psychological step discounts of 10%, 15%, 20%, and so on are granted. Customers get used to this behavior and know to ask for the following 5% discount in the next round of negotiation.
Suppose you offer a 20% discount, and the customer asks for more. Anytime a sales rep doesn't fight 21%, 22%, or 23%, and gives 25% off, there's a lot of money left on the table. The best way to change this behavior is to link discounts to sales incentives, leading to our last discussion.
5.- Benefits by sales representative
Analyzing profit per sales rep can be very simple and highly political too. Although reasonably easy to calculate, such an analysis can have a powerful impact when used correctly.
Many financial institutions classify sales reps by revenue. But shouldn't profits be at least as necessary as revenue?
Best-in-class institutions rank sales reps by total profit contribution as the main driver to create incentives, including shareholder return as part of the equation.
In general, Bank Analytics can help:
Increase the ability to address and monitor governance
Increase transparency and understanding of risk exposures to manage the business more effectively
Develop a risk-adjusted view of profitability
Manage long-range incremental costs effectively
Measure customer and product profitability
Identify "high-potential" value propositions and business models
Improve the ability to target products and services to customers
Enhance specific elements of the offer—product, pricing, channel
Allow senior management to make data-driven operational decisions
Pedro San Martin, CPA, MBA, is Strategic Finance & Analytics Principal at MyABCM USA / BDO Innovation Lab. He's a member of the Institute of Management Accountants-Spain Chapter. You can reach him at firstname.lastname@example.org