Too many banks act like puppets when it comes to pricing strategies, and too often a competitor is the puppet master.
For example, when a competitor raises its certificate of deposit rate or has a loan sale, most banks in that market feel compelled to do likewise. I have received many complaints from bank presidents who monitor the bank advertisements and agonize when competitors outdiscount them by a quarter- or even an eighth-of a percentage point. By matching a competitor's offer we allow ourselves to parrot the competitor's marketing strategy rather than chart our own course by giving our customers a different choice.
Using customer information to give more valued customers a better choice is the only way to go. But without customer information, we all focus on gross numbers and volume growth, without recognizing that volume may not equal value. We may know that deposits have increased by significant amounts, but we don't know whether they were generated by loyal, profitable customers or by rate-surfing customers who would yank them out as fast as they put them in.
Bankers need to stop mimicking their competitors and take charge of their destiny by differentiating the value they offer their clients.
Customers already accept differentiation and expect it. This is particularly true in airlines, hotels, or car rentals. It is becoming more prevalent in food retailing, where customers accept the fact that offers through discounts or coupons were based on the value and volume of their purchases. We already know that all customers are not equal. We need to incorporate this fact into our business strategy by differentiating our marketing activities to provide different value propositions to different customer segments.
We all respond to positive reinforcement and avoid negative reinforcement. We practice this every day. Consider how your own behavior is influenced by your interest in maximizing frequent-flier miles. You may choose a route that is less efficient and has a stopover in order to fly your selected carrier. You will charge expenses on the credit card for the airline for the same reason you chose hotels and care rental companies. All this is because you have selected an airline that rewards you the more you do business with it.
Different pricing schemes encourage us to behave differently. For example, most of us have discovered that magazine subscriptions are cheaper when you let the subscription expire. Shortly thereafter, you will be offered a last ditch, incredibly low subscription rate after your own subscription has lapsed. In this instance, disloyalty pays off.
We as bankers need to understand the profitability dynamics of our customer base and reward loyalty. This is a major departure for most banks. Like department stores, our industry's promotional activity has taught customers not to bank with us unless we are having a sale. We are rewarding customer self-interest rather than long-term loyalty. Department stores have taught us that the best time to shop is when they have a sale and we want to buy only the item on sale. Banks have been the same way.
Instead, we need to learn to focus on high-potential customers, and at the same time accept the "intelligent loss of business" while investing in those customer segments that give us the most profit.
Grocery retailing has taught us that the more a retailer moves away from average pricing toward differentiating pricing, the more its profits increase.
Grocery stores now have programs that promise, "The more you shop at our grocery store, the more you will save." One chain that makes such an offer recently reported that traditional mass-market-advertising costs have dropped 50%, while same-store sales are up 5% and gross profits are also significantly higher.
Differentiated marketing works and we need to be careful not to become the last bastion of average pricing. Instead, we should say, "The more you bank here, the better off you will be."
