Increase Margins in Private Banking With These Pricing Strategies

Private banks’ and wealth managers’ margins are under pressure as customers become increasingly price sensitive. How can financial service companies overcome this challenge? Learn ways to achieve sustainable margin growth in five lessons inspired by other industries’ best practices.

Margins in the private banking and wealth management industries are under pressure. Much of the recent growth in the securities market has been driven by self-directed business, in large part thanks to trading platforms with a do-it-yourself concept, such as Flatex and Consorbank. In addition, the MiFID II guidelines introduced a few years ago have significantly increased cost transparency. Lastly, large wealth managers are getting involved in direct sales with simple and transparent offers, such as Wealth Expert by Fidelity, and competing for the attention of wealthy customers.

To respond effectively to these challenges, private banks and wealth managers don’t have to reinvent the wheel -- they can learn best practices by looking to other industries.

Five golden rules

Successful product bundling and pricing structures are everywhere. Best-in-class companies, regardless of industry, design their range of products and services in a way that fully taps their customers’ willingness to pay. Here are five lessons private banks and wealth managers can take away from them.

1. Different customer groups use different services

For a good example of a customer-oriented approach, banks need look no further than Netflix. The streaming service identifies and fulfills individual customer needs much better than banks typically do with their one-size-fits-all models. Netflix recognizes there is no such thing as the “average” customer and has developed intelligent service bundles to secure the loyalty of a diverse customer base.

The basic subscription has limited features; users can only view content in low resolution on one screen at a time. Upgrading to a standard subscription allows a streaming experience on two screens in HD, and with the family-friendly premium subscription, users can watch HD content on up to four screens and get additional benefits. This approach ensures Netflix has an offer that fits any need or budget.

What’s more, the option to downgrade to a standard subscription serves as an internal safety net for customers who are no longer interested in their premium subscription and at high risk of churning.

Private banks and wealth managers would be wise to consider Netflix’s subscription setup. After all, five years from now, how many customers will still subscribe to Netflix, and how many will still be with their bank?

Lesson for private banks and wealth managers: A leading Swiss private bank took a page from Netflix’s book and optimized its range of offers and prices in investment advice for different usage segments. Its customers can now choose from three options: The entry-level offering is intended for buy-and-hold customers, who usually make one or two trades per year, while the classic package is available for those looking to define an individual investment strategy with the bank and have it monitored continuously. The highest-level offer includes more exclusive services, such as contact with a dedicated investment advisor. Private banks and wealth managers should seriously consider this rule when designing a differentiated range of offers, especially in the advised business segment.

2. The price model is more important than the price level

A good example of this is Michelin. The French tire manufacturer originally charged customers a fixed price per tire. Then, it developed a new tire that lasted 20 percent longer than its previous products. At first, Michelin considered adding around five to six percent to the price of the current product series for this added value but quickly realized it would have to explore alternative monetization models. Due to the longevity of its new product, customers would have to replace their tires far less often, and going with a simple markup would have resulted in disastrous earnings effects for the tire manufacturer.

Today, Michelin uses a price-per-kilometer model called Michelin Fleet Solutions, which allows the company to fully monetize the added value of its tires. In order to ensure a proper pay-as-you-go calculation of the kilometers driven, trucks are equipped with GPS technology.

Lesson for private banks and wealth managers: The way a bank charges fees can have a dramatic impact on its revenue. When selecting a pricing model, it’s important to find one that reflects customers’ usage behavior and preferences. Many German private banks are moving to an all-in-one model for areas of banking outside the context of wealth management and have started bundling the price components for custody, advice, and transactions in a single price. While this model offers many advantages, e.g., simplified customer communication, it does come with its share of disadvantages (e.g., the loss of fund subscription fees as well as missing out on the positive effect of volatility peaks) that need to be carefully considered.

3. Consumers make irrational purchase decisions

Imagine your friend has invited you over for dinner, and you want to bring a bottle of wine. Your local grocery store has three red wines for you to choose from, priced at 15, 19, and 25 euros. You’re not familiar with any of the brands or quality. Which bottle would you go with?

While a sommelier might base their decision on grape blend or region, the majority of German customers would reach for what feels safest: the middle-priced wine. To them, the 19-euro bottle seems like a happy medium that doesn’t come across as stingy, like the least expensive bottle, and doesn’t waste money, like the most expensive one. The tendency toward the middle is known as the compromise effect and is just one example of the many behavioral pricing methods that companies can use to profit from irrational consumer behavior.

Lesson for private banks and wealth managers: The same principle applies in banking. A leading European online broker recently increased the number of its offer options to three clearly delineated plans. The very limited entry-level offer – one trade per month included in the platform fee – provides an incentive for inactive customers to increase their engagement on the platform. With the standard middle option, customers are able to get lower transaction fees in exchange for a slightly higher monthly fee, similar to the Deutsche Bahn’s “Bahncard” approach. The premium model monetizes the very specific needs of frequent traders, such as access to real-time market data and trading tools.

4. How you communicate price matters

People often judge a city based on how expensive they think it is. For tourists, the price of beer is an important anchor point; Munich and Cologne are good cities to illustrate this.

A beer at Munich Oktoberfest costs, on average, 11.30 euros but will only set someone back 2.50 euros at Cologne Carnival. At first glance, the Munich price might seem outrageous – that is until the bar staff places a full one-liter mug on the table. To get the same bang for their buck in Cologne, it’ll take a few more rounds of 0.2-liter Kölsch before the customer finally sets their coaster on the rim of their glass to signal they’re done.

So which city has more expensive beer? Many think Munich initially, and if you do a quick survey of Cologne residents, they’ll insist their city has the cheapest beer in Germany. In reality, beer at Cologne Carnival costs 12.50 euros per liter, which is a surcharge of 1.20 euros compared to the Munich price.

Lesson for private banks and wealth managers: Breaking fees down into smaller units can have a positive impact on price perception. While a minimum annual service fee of 5,000 euros seems expensive, four quarterly payments of 1,250 euros may be more attractive to customers.

5. Price strategy and customers collide in sales

Imagine you’re ordering a pizza from your local pizza place. Both you and another customer order a large Hawaiian pizza, but when you go to pay, you discover you’re being charged an extra two-euro service fee. You ask the cashier about the price difference, and they explain that they always charge people in jeans one euro more and people in green shoes one euro less. For you as a customer, this doesn’t make any sense, and you start thinking it might be time to order from somewhere else. In a banking context, this is analogous to charging one of your customers five euros and another 10 euros per trade for an identical service and transaction amount – to the customer, this just seems unfair.

Lesson for private banks and wealth managers: Treat customers fairly when granting special conditions. Train sales teams to properly enforce target prices and effectively justify price differences between customers who book similarly high assets with the bank. Digital solutions to professionally manage revenue and special conditions can also support banks in making price decisions with all the necessary information about the economic effects of special conditions.

Conclusion

Private banks and wealth managers are only partly responding to the offer and pricing needs of their customers. While financial service offerings and value propositions differ significantly from consumer companies like Netflix and tire manufacturers like Michelin, financial service companies can still take away important lessons by looking at how leading companies in these industries price their products and services.

As the regulatory and investor landscapes evolve, private banks and wealth managers will inevitably be forced to innovate their offerings and pricing strategies if they want to increase their revenue and stay relevant to their target group.

This article was originally published in the private banking magazine.