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Nancy Feig
Nancy Feig
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Price Optimization is Catching On

With an increasing number of banks taking up price optimization, industry analysts insist it is time to bring the practice to light.

It's time for banks to open up about their price-optimization strategies, says Gartner (Stamford, Conn.) principal analyst Richard J. De Lotto. "Enough banks are doing it that it's not a competitive advantage to remain silent," he contends, suggesting that the industry could benefit from cooperating on price optimization.

For banks to take their price optimization efforts to the next level, De Lotto adds, they need to hire specialists to lead the analysis. But, he points out, without revealing their strategies, it will be difficult for banks to attract qualified talent, which is in short supply.

According to De Lotto's research, more than 55 percent of banks already have adopted some form of price optimization, and more than 75 percent plan to use price optimization in some way by 2012. The report surveyed 34 top banks from across the world; more than half were based in the U.S.

Price optimization is the method of finding the right price for particular customers by channel, segment, geography, market or product. The key to price optimization that is absent in other pricing strategies is customer elasticity, the extent to which demand falls as price rises.

De Lotto notes that while European banks appear more forthcoming about their price-optimization efforts, U.S. banks still keep their strategies close to the vest. This could put U.S. institutions at a disadvantage in global competition.

In addition to the competition, banks appear to be hiding from the media and activist groups, De Lotto relates. "There is a consistent belief that if word gets out to the ... press, users of price-optimization software will be deemed users of price-gouging software," he says. "Making a profit is still looked at as an evil thing."

But price optimization is about tightening management control over process, not price gouging, De Lotto insists. "Taken as a single technology, price optimization is just about finding out what motivates someone to make a purchase," he explains, adding that the strategy is most widely implemented in retail banking and primarily in the lending arena.

Many banks are building their own solutions in-house to leverage the databases and lending and pricing systems in which they have already invested, De Lotto says. Others are purchasing price optimization as a service from outside consultants, such as Accenture (Chicago), Deloitte (New York), IBM Global Business Services (Armonk, N.Y.) and Inforte (Chicago). Price optimization software also is available as part of pricing suites from vendors such as Acorn Systems (Houston), Nomis Solutions (San Bruno, Calif.), Suntec (Trivandrum, India) and Zafin Labs (Dubai).

"It's spreading," De Lotto notes. "Everyone is convinced that their competitors are optimizing." In fact, while only 6 percent of bank executives surveyed actually knew of a competitor engaging in price optimization, 64 percent suspect their competitors have already implemented it, according to the report.

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