Repricing product lines can bring big returns.

Banks need to reprice their product lines systematically to reflect the value of those products to the customer and the cost to the bank.

The results of systematic repricing are impressive - for example, $16.3 million in additional revenue for Star Bank of Cincinnati, and $15 million for Chase Lincoln First of Rochester, N.Y., constituting a 19.4% and 18.1% increases, respectively, in fee revenue.

Our previous two articles showed why banks have mispriced in the past, and provided the analytical foundation for a new way of thinking about pricing. In this article, a comprehensive and creative approach to reappraising banks' pricing will be outlined.

Linking price to value provides the core foundation for generating repricing options. It provides a basic framework for comprehensively reappraising the bank's prices at the subproduct level. However, under the value umbrella several dominant repricing themes emerge: namely, streamlining product and service offerings, charging for the value of tailored service, standardizing and simplifying product delivery, tiering prices, and identifying new pricing opportunities.

* StreamliningOfferings. By streamlining product and service offerings, banks are able to reduce the number of overlapping products and eliminate products and services with low customer usage. Not only does this reduce the level of customer confusion, but also substantially improves the overall profitability of individual product lines.

One bank, for example, discovered that its branches still supplied more than 100 distinct deposit account products - grandfathered from multiple earlier acquisitions - to very specific categories of customers. Streamlining these accounts increased revenues by $3 million annually.

* Charging for Value. In charging for perceived value, the objective is to match the fees charged for each of the bank's products and services to the relative value attached to them by the bank's customers.

In situations where the customer attaches high value to a particular service, providing a more tailored approach may be warranted (where the bank's unique brand of service and superior ability to meet the needs of customers, for example, contribute greatly to its market position, or enable it to retain its most valuable customers).

Analyzing the relationship between the price charged and the value customers attach to each of the bank's products, and comparing this with competitors, allows the identification of areas with repricing potential.

What Do Rivals Do

To illustrate, the perceived customer value of one bank's business premium savings product exceeded that of its four key competitors, while the price charged to customers trailed three of the four. The bank used this information as the basis for increasing the price charged for the product to the level of its competitors. This generated $400,000 in additional revenues.

In situations where the customer perceived value is believed to be low, the option of raising price in order to dissuade customer use should be seriously considered.

For example, one bank offered a purchase protection plan as an enhancement to its credit card product simply because this was available with competitors' cards. The bank discovered, however, that the perceived customer value of its purchase protection plan was low. This allowed the bank to raise the annual fee charged for the plan, and thereby reduce the number of subscribers to the point where service could be completely eliminated. The policy change had no impact at all on the overall number of credit card holders.

* Standardizing, Simplifying. Customer relationship analysis identifies the revenues generated from specific customer segments and their associated transaction volumes and costs. It reveals the extraordinary amount of embedded cost that exists in tailoring products and services to the specific needs of individual customer groups. Standardizing transactions and simplifying product delivery, by limiting the degree of tailoring, can materially reduce these costs.

As an example, the retail area of one bank discovered that publishing one central customer service phone number, rather than each individual branch's, ensured that customers received a consistent level of service quality, while reducing the cost of such service.

Cutting costs in this way can increase the bank's pricing flexibility to lower charges for the rationalized product or service offering.

* Tiering Prices. Information gathered through the customer relationship analysis also helps to identify which customers contribute the most to cost and profit, enabling the bank to reprice products and services to reflect the size of customer balances or volumes of transactions - that is, price tiering.

Those customers having the highest balances and lowest transaction volumes often contribute the least to the bank's overall cost.

Charging more to customers with lower balances and higher transaction volumes can therefore enhance the revenue and profitability of product lines without risking the loss of the bank's most valuable customers. To achieve its full potential, this form of differential pricing should be applied to the individual components of each product to help ensure that the price ultimately charged reflects the actual costs of low balance/high volume users.

At one bank, tiering prices on its consumer liability products led to $2.2 million in additional revenues. Changes included introducing low-balance fees on all demand deposit accounts with balances less than $200, increasing the quarterly fees on savings accounts with balances less than $100 from $2.50 to $5, implementing a $5 low-balance maintenance fee on personal money market savings accounts, and increasing withdrawal fees on low-balance accounts from 20 to 25 cents per item, among other charges.

In exploring new pricing opportunities, the bank designs new products that can be delivered by leveraging its existing resources. Doing so offers each business area a fresh source of revenue, and helps to enhance the overall profitability of specific product lines. Since there will be very little, if any, basis for pricing these products initially, the bank should approach such pricing conservatively until an adequate amount of information can be gathered to evaluate the level of each product's success.

For example, at negligible incremental cost, one bank began offering a money market fund to outside mutual funds that did not have a product of their own. Upon obtaining just one new account, the bank increased its revenues by $400,000.

The final, key issue when exploring repricing options is how to address the inordinate amount of the bank's revenues lost annually to fee waivers. Limiting the number of occasions that customers are relieved of their obligation to pay fees allows the bank to eliminate the chronic abuse of escape clauses for specific groups of customers.

One bank discovered that these waivers amounted to over $4 million in lost revenues out of a total potential of about $80 million. Hardwiring fees and only selectively granting waivers reduced lost revenues to under $1 million.

The above broad-based themes collectively provide a basic framework for addressing the value and cost issues uncovered by the analyses outlined in our second article.

Based on the specific characteristics of each business area, a portfolio of repricing ideas, centered around these themes, can be developed consisting of as many as 500-750 individual repricing opportunities.

Two further steps, however, are then required:

* Run-Off Analysis. Employing the results obtained by analyzing the run-off caused by historical price changes, the bank is able to quantify the likely runoff and net revenue impact of each proposed repricing idea, and the portfolios collectively. The expected reduction in number of accounts, account balances, transaction volumes, and the resulting net revenue impact at various price points, helps set the overall boundaries and risk profiles for the proposed repricing options.

* Burden Analysis. This establishes the degree to which individual customer segments are affected by the combined impact of the proposed repricing ideas. Calculating the relative resulting change in fee burden and overall contribution for each customer segment across all product lines prevents the bank's most valuable customers from bearing a disproportionate share of the proposed repricing. In situations where such customers would bear too high a burden, the bank revises the repricing proposals accordingly.

Most bankers know they face a revenue crunch over the next few years, and discipline in pricing to generate recurring streams of fee income is critical to meeting this earnings challenge. The repricing potential is there; capitalizing on it should be one of the top priorities on bank CEOs' agendas.

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