PRICING IN FINANCIAL SERVICES
Ing. Kateřina Matušínská, Ph.D.
MARKETING OF FINANCIAL SERVICES/NAMAF
OUTLINE OF THE LECTURE
1. Price defining
2. Types of prices
3. Pricing factors
4. Pricing methods
5. Pricing mix
6. Price elasticity of demand
7. Pricing strategy
PRICING IN FINANCIAL SERVICES
PRICING IN FINANCIAL SERVICES
1. PRICE DEFINING
• The sum of the values that consumers exchange for the
benefits of the ownership or use of goods or services.
• The monetary amount stipulated in the purchase and sale
of goods or determined by a special regulation (Act about
prices).
• Interests, bank charges, insurance, mortgage interests,
commissions on insurance contract conclusion ...
• Alternative costs!!!
• Costs, competition and customer expectations must be
taken into account at the same time within the pricing.
PRICING IN FINANCIAL SERVICES
PRICE DEFINING
• The price reflects the value of the product for the customer.
• Price is the most important, but not only one factor that
influences demand.
• Price is the only element which generates earnings. The other
tools of the marketing mix represent costs.
• Pricing is a key decision that significantly affects the future
existence of company.
• The price in terms of time is the most flexible variable.
PRICING IN FINANCIAL SERVICES
PRICE DEFINING
• Objectives of pricing should include:
• to achieve the financial goals of the company (i.e. profitability),
• to fit the realities of the marketplace (Will customers buy at that
price?),
• to support a product's market positioning and be consistent with
the other variables in the marketing mix.
• From the marketer´s point of view, an efficient price is a price that
is very close to the maximum that customers are prepared to pay.
• A good pricing strategy would be the one which could balance
between the price floor (the price below which the organization
ends up in losses) and the price ceiling (the price be which the
organization experiences a no-demand situation).
PRICING IN FINANCIAL SERVICES
PRICE DEFINING
Total annual fees associated with the current bank account
Source: www.bankovnictvi.ihned.cz
AVERAGE CLIENT BRANCH CLIENT ELECTRONIC CLIENT
PRICING IN FINANCIAL SERVICES
RPSN
• The annual percentage rate of charge covers not only the
interest rate but also most of the fees charged – for example:
• fee contract,
• account management fee,
• loan administration fee,
• transaction fees,
• Insurance of repayment ability,
• and more.
• Act no. 257/2016 Coll., About Consumer Credit, instructs banks
to indicate the RPSN for almost all loans.
PRICING IN FINANCIAL SERVICES
RPSN
• GE Money Bank presents the mortgage with interest rate
2.99 %, but if you're not careful, you can end up with an
RPSN of 4.7 %, which now it doesn´t look so tempting - when
a mortgage is 1 500 000 CZK and repayment period of 30
years, the difference is 455 000 CZK!
• The aim is to ensure fair advertising of credit products
and the possibility of comparison!
PRICING IN FINANCIAL SERVICES
Internal
factors
PRICING
External
factors
Customers and their ability to pay
Competitor actions
Input costs
Fixed objectives of the company
Pandemic situation
Legislation
Economic crisis
?
PRICING IN FINANCIAL SERVICES
2. PRICING FACTORS
3. METHODS OF PRICING
• Costs
• Competition
• Demand - customer!
• Legislative regulations.
PRICING IN FINANCIAL SERVICES
4. TYPES OF PRICES
• Skimming price
• Penetration price
• Competitive price
• Segmented price
• Price accepted by the customer
• Two-piece price
• Cost price
• Introductory price
• Individual price
• Price „of the turnover drafter“ (hidden price)
• Psychological price
PRICING IN FINANCIAL SERVICES
5. PRICING MIX
1. The basic price level
2. Price discounts and reductions
• the realization of multiple products at once, payments
before or on time, loyalty discounts, use of electronic
distribution, ...
3. Price surcharges
• preterm payment, individual products, additional services
...
4. Contractual conditions (payment and delivery)
PRICING IN FINANCIAL SERVICES
PRICE REDUCTION
• The need to increase the sales.
• Market share declining.
• Cost reduction.
• Change of the product life cycle.
• And more.
Trap of low quality!
Trap of fragile market share!
Trap of shallow pockets!
PRICING IN FINANCIAL SERVICES
PRICE INCREASE
• Cost inflation.
• Excessive demand.
• And more.
PRICING IN FINANCIAL SERVICES
6. PRICE ELASTICITY OF DEMAND IN FINANCIAL
SERVICES
• Price elasticity of demand for financial services is generally
lower!
• The basic obstacles of customer mobility in financial services:
• Information asymmetry.
• Client disinterest.
• Unclear charges.
• Product packages – tying of products.
• Administrative burden.
• Fees for cancellation of existing products.
PRICING IN FINANCIAL SERVICES
CLIENT´S STANDARD OF MOBILITY
• The basis of the Code „Standard of Client´s Mobility - Procedure for
Changing Banks" are common principles of EBIC (European Banking
Industry Commitee), which were developed by banks, savings banks and
other payment service providers (appeal of the European Commission in
2008).
• The term „change bank“ means, for the purposes of this Code, the
following activities:
• Opening a bank account in a new bank.
• Converting all standing payment orders and direct debits from the original
bank to the new bank.
• Cancellation of current account in the original bank through a new bank.
• …
PRICING IN FINANCIAL SERVICES
7. PRICING STRATEGY
• Strategy of low prices and a focus on low costs
• based on the principle of reducing costs while increasing the
number of products provided, the use of energy-saving
technologies, new methods of work organization, limitation of
irrational costs
• focus on standard products, decreasing number of
modifications
• Strategy of high prices and a focus on excellence and
unique features of the product
• prices are higher about 5 – 25 % than standard products
• classic product is enriched with the unique characteristics
regarding both quality and technological-parameters, such as
the preparation of the marketing mix
PRICING IN FINANCIAL SERVICES
PRICING STRATEGY
• Combined strategy
• product innovation which is enriched with additional
features while maintaining low prices
• Standard price + surcharge according to enriched
properties
• Adaptation strategy – following the "market leaders"
• based on the price level in some area and then adaptation
to prices movements in market
PRICING IN FINANCIAL SERVICES
PRICING STRATEGY – PRICE REDUCTION!
• Trap of low quality
• Trap of fragile market share
• Trap of shallow pockets
PRICING IN FINANCIAL SERVICES
PRICE SENSITIVITY AND CONSUMER PSYCHOLOGY
• Reference Price Effect – buyer’s price sensitivity for a given
product increases the higher the product’s price relative to perceived
alternatives. Perceived alternatives can vary by buyer segment, by
occasion, and other factors.
• Difficult Comparison Effect – buyers are less sensitive to the price
of a known or more reputable product when they have difficulty
comparing it to potential alternatives.
• Switching Costs Effect – the higher the product-specific investment
a buyer must make to switch suppliers, the less price sensitive that
buyer is when choosing between alternatives.
• Price-Quality Effect – buyers are less sensitive to price the more
that higher prices signal higher quality. Products for which this effect
is particularly relevant include: image products, exclusive products,
and products with minimal cues for quality.
PRICING IN FINANCIAL SERVICES
PRICE SENSITIVITY AND CONSUMER PSYCHOLOGY
• Expenditure Effect – buyers are more price-sensitive when the expense accounts
for a large percentage of buyers’ available income or budget.
• End-Benefit Effect – the effect refers to the relationship a given purchase has to a
larger overall benefit, and is divided into two parts: Derived demand: The more
sensitive buyers are to the price of the end benefit, the more sensitive they will be to
the prices of those products that contribute to that benefit. Price proportion cost: The
price proportion cost refers to the percent of the total cost of the end benefit
accounted for by a given component that helps to produce the end benefit (e.g., think
CPU and PCs). The smaller the given components share of the total cost of the end
benefit, the less sensitive buyers will be to the components' price.
• Shared-cost Effect – the smaller the portion of the purchase price buyers must pay
for themselves, the less price sensitive they will be.
• Fairness Effect – buyers are more sensitive to the price of a product when the price
is outside the range they perceive as “fair” or “reasonable” given the purchase
context.
• The Framing Effect – buyers are more price sensitive when they perceive the price
as a loss rather than a forgone gain, and they have greater price sensitivity when the
price is paid separately rather than as part of a bundle.
PRICING IN FINANCIAL SERVICES