Pricing Optimization: The Double Whammy

April 15, 2012 by  Filed under: Credit 

Pricing optimization can be used by financial institutions (FIs) to not only maximize returns by offering the optimal rates for financial products for each consumer, but can also be used to increase customer acquisition. Pricing optimization is used to help FIs find the ‘sweet spot’ where they can offer consumers the rates that will provide high returns and low risk for the FI, and still be attractive enough to consumers that they will not be lured away by other institutions. To correctly predict where this price point is, pricing optimization software can be used to statistically predict the terms that will best fit the price sensitivity of each consumer as well as offer optimal benefits to the FI.

FIs are able to offer each consumer attractive terms through pricing optimization because the FI compares information from each individual consumer against the criteria for the products offered by the bank. This is beneficial both to the FI and the consumer because the bank does not incur more risk than their desired level, while the consumer is made the most attractive offer possible, based on their past financial behavior.

Customer acquisition can be increased through pricing optimization because of the focus on what the consumer is likely to accept on an individual basis. Through pricing optimization, account terms for each consumer are determined on an individual basis, taking into account two factors: the worthiness of the consumer and the goals of the FI. To gauge the worthiness of consumers, FIs analyze credit history, incurred risk, and potential profitability of the consumer. Through calculations that determine how creditworthy the consumer is, the FI can not only offer them a product, but can make an offer that directly reflects how profitable the customer can be in the future. To achieve the goals of the FI, banks use price optimization to analyze what terms they can offer that will lead to metrics such as increased account opening, increased numbers of consumers, or decreased instances of attrition.

Overall, financial institutions can use price optimization software to enhance account opening efforts by offering account terms that will benefit their institution and simultaneously reflect the financial responsibility of the consumer. Consumers will receive terms that are optimized for price based on their past actions and predicted future actions. Because the terms of the account are being optimized for both parties, both the consumer and the FI realize the most benefits possible.

Kelty Wallace is a SEO specialist and copywriter for Zoot Enterprises in Bozeman, Montana.

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