Too often, wholesale banking product pricing is either negotiated or market-driven, with little attention paid to profitability. TowerGroup believes that what it terms ârelationship-based profitability and pricingâ solutions can help a bank ensure that its pricing meets its profitability goals while retaining valuable customers. TowerGroup defines relationship-based profitability as the overall economic return (or loss) arising from a customerâs use of various bank products or services.
Banks face a number of challenges when constructing the âbuilding blocksâ that support relationship-based profitability and pricing â which include account and transaction data, product and customer costs, credit quality and risk profiles, loyalty assessments, and profitability and pricing calculations. Without pursuing an approach that builds toward relationship-based profitability, a bank has no assurance that its pricing will adequately compensate it for supplying products and services while providing customers with a price that rewards them for their relationship with the bank.
As banks begin to address this need, best practices are emerging in the areas of model development, customer management, and information management. Ultimately, TowerGroup believes banks that implement relationship-based profitability and pricing will establish the foundation to provide one-to-one marketing for their business customers, improve customer satisfaction, increase retention, and deepen product cross-sell.
The TowerGroup research report titled âCommercial and Small Business Banking in Troubled Times: Using Relationship-Based Pricing for Growthâ and a companion report titled âCommercial and Small Business Relationship-Based Profitability and Pricing: Putting it All Together,â are authored by Patricia Hines, research director for the Wholesale Banking practice at TowerGroup.