When Bain Talks Pricing, People Listen

August 28, 2017 Maria Abbe


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Jim Young and Dallas Wells discuss a recent infographic from Bain & Company that dives into price setting and price getting - a topic we cover in our book, Earn It: Building Your Bank's Brand One Relationship at a Time. How do you determine your price and what are the ways you're getting that price? Learn how to avoid becoming a commodity business in this episode.



Helpful Information

Jim Young LinkedIn

Dallas Wells LinkedIn

Pricing: The Best Way to Boost Profits

B2B Pricing Prison

Podcast Transcript

Jim Young: Hi and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, director of communications at PrecisionLender. I'm joined again to day by my co-host, Dallas Wells, VP of client development at PrecisionLender.
Today, we're going to go a bit old school and return to some themes that we addressed early on in our book, Earn It. We're going to talk about the importance of pricing and the concept of price setting versus price getting. Why these oldies but goodies? Because the highly respected consulting firm Bain & Company came out of with an infographic recently on the subject that got us talking a little bit. Dallas, why don't you start off by explaining the key stat in that Bain infographic?
Dallas Wells: Yeah. I think it's a really good infograph. We'll of course link to it in the show notes. The infographic's basically called Pricing Is The Best Way To Boost Profits. What they is they compare the inputs essentially, the things that you can affect and what impact they have on the bottom line. For example, if you make a 1% improvement in your fixed costs, that translates to a 3% improvement in income. What they're looking for is what thing that you can manage has the biggest impact.
Fixed cost, 1% change results in 3% better earnings. Variable cost, 1% change is 4% improvement in earnings, same for market share. Then there's the big one, which is realized price. Realized price, if you make a 1% improvement in that, that translates to an 8% improvement in earnings. It's this way outsized impact if you get pricing right, versus all the focus that we see, not just in banking but in industries all over the place, about cost control and gaining market share and things that maybe get way more mind share than pricing does.
Jim Young: Yeah. I was thinking about in terms of the market share, when a lot of times in order to get market share you end up dropping price.
Dallas Wells: Yeah, exactly.
Jim Young: Yeah. Is this, basically this seemed very reminiscent to me of the McKinsey findings that we referenced in Earn It. Is this essentially the same argument or is it slightly updated?
Dallas Wells: The date is updated a little bit, the numbers are slightly different, but the takeaway is the same. I think that what that tells is it's one of those things where it starts to be consistent because it's just a truism. The arithmetic actually flows through there, of how much a change in price really does just drop to the bottom line, versus all the cost issues there. I think you've got different companies coming up with different data points in two pretty different time frames, and they have the same answer, come to the same conclusion.
Jim Young: Yeah. As I mentioned too, very, very respected companies doing that research. They also talk in that infographic, they then get into the construct that they call price setting and price getting. Setting aside that we really should have copyrighted those phrases when we wrote the book.
Dallas Wells: Yeah.
Jim Young: Although it's probably not, we probably weren't the first to use them either. Is their version of price setting and price getting essentially the same as what we discuss in the book? Or does it vary in any way?
Dallas Wells: It's the same basic idea. Ours is tailored much more specifically to banking, but the two big concepts are really the same. Which is, price setting is exactly what it says. It's the way that you go about determining what the right price is. So in banking that's the math and really the risk adjusted math of what is the appropriate rate to put on that particular structure. That's the science one, and the one that bankers spend the vast majority of their time thinking about and working on.
Price getting, which I think translates more directly to the realized price that's in their study, price getting is actually getting that price that you set onto the books. So, did you have to discount from there, variations in the deals, competition, how does all that actually translate to realizing the price that you would like to get? Theirs is slightly different, they're taking a much broader aim at it about covering lots of different industries. Ours was more banking specific, but again, same ideas.
Jim Young: Got you. Kudos to the Bain marketers because that first infographic got me clicking on their call to action, which led me to their website, which led me to another infographic on pricing. This one was called, B2B Pricing Prison. It uses the initial stats are the same as the previous one, about the outsized impact of pricing. But then below it it had some really interesting points about how to look at pricing differently. The first one was that pricing isn't always the customer's top concern. I don't know about you Dallas, but I immediately got flashbacks to the borrow interview that Bob Moesta and Chris Spiek did at Bank On Purpose. Can you, for our listeners, summarize what that interview was like for people that weren't in Austin?
Dallas Wells: Yeah. We'll link to this also in the show notes. I personally thought that if you were going to away from Bank On Purpose and watch one thing that was there, spend the time to watch one video from there, watch that one. It's really powerful. What Chris and Bob do, is they talk about the jobs to be done framework. We've mentioned that on this podcast before, but basically what are you hiring the bank, or more specifically hiring this loan, to do for your business. That's how you need to think about loans to best meet your customers needs.
To show this in action, they brought a real live commercial borrower up on stage and just basically interviewed him and walked through his decision process of why he switched from one bank to the other. Without knowing, they purposely didn't want to know too many details about that decision or the banks involved or the players involved, they wanted it to come on stage because they had an inkling that this was the case, because it almost always is, right? Where even if the initial thing that you're borrower complains about is the price, the rate was too high, that's not really why they went with someone else.
They walked through this whole process of changing and what drove that change. Really it came down to the borrower trusted the bank that they switched to more. They felt like they were going to better follow through on the promises that they made, be better able to actually execute on what they promised. They ended up paying, the business actually ended up paying a more expensive rate to get the deal done. They took less favorable terms because they felt more comfortable with the people.
There's, again, lots of good details in there in that my brief summary won't do justice to. If you like talking shop, you like talking about deals and getting the perspective of the borrower, definitely worth your time to go check that out. The big takeaway, not always about price even if that's the first thing they tell you.
Jim Young: Yeah. That is what that stat echoed, that they echo in the infographic, talks about, is that it's pretty striking. Definitely encourage you to take a look at it on the Bain site. As Dallas mentioned we'll have a link to it. They also then have some myths in there, some common pricing myths. Any of those in particular strike you?
Dallas Wells: Yeah, a couple of those jump out. They're common themes that we talk about a lot. The other thing they have in their infographic is some pretty sweet jail and handcuff images on there, to really complete their metaphor. The way they phrase it is, "Escape pricing prison by avoiding these common myths." The ones that jumped out, that I thought were interesting. The very first one, it says, "We must accept the market's price for our commodity product." There's lots of examples about this outside of the banking world, where companies that sell true commodities are able to charge premium prices for lots of reasons. They find a way to add value to that product that they are selling.
This is one that comes up in just about every conversation with a bank that we have. Which is they say, "Look," basically some version of, "Our money's just as green as the bank down the street, right?" Everybody's selling the same basic product, which is funding in terms of a loan, or the same basic type of checking and treasury management type services. Some slight differences maybe on the wrappers or those deposit products, of what apps are available, that kind of stuff, but for the most part it's the same product. So why are some banks able to charge much more than others? The banks that think of it that way, that think of it as a commodity product, they tend to price it that way and sell it that way and realize those kind of results. But there are plenty of banks out there that don't do that.
This is why pricing is such an important consideration here, especially in banking. Pricing is the product because when we talk about pricing, it's not just the interest rate but it's all the structure that goes around it. What was the term? Was it a fixed rate or a variable rate? Who had to guarantee the loan? What type of collateral did you have to pledge? Did you have to bring in these other deposit accounts or not? Basically, how were you able to meet the customer, where they are and where their business is, to put together a deal that best fits their project with the least amount of impact on the rest of their business? Yeah, it's cash that you're putting into their account to do what they need to do with it, and it will have an interest rate attached, but it's not really a commodity, unless you design it that way.
If every single deal you quote is a five year fixed rate balloon, then yeah, you're probably going to end up being treated as a commodity dealer because that's what you've made it into. That was the first one, and again that's the most common on, the top of their list. It would probably be at the top of our list too. The other one was the third one of their list. Which was, pricing rules will hamstring our sales force. This is what's really interesting about the role that we play in working with banks. Talking about pricing, we end up with two sets of users, sometimes two sets of buyers for our product in a bank. On the one side you've got the treasury finance credit folks who are determining the risk levels, the risk appetite, the price that we would like to get to fill the bank's portfolio.
On the other side then you have the sales force. They're the ones who it's their job to actually go out and hit production numbers, actually get loans sold to end customers. There's this natural friction between those two groups. Our service, our software sits right at that junction, and so we hear both sides of that. We hear those folks who are responsible for production saying, "Look, if you put too many rules in place, you can kiss the production goodbye. It's going hamstring the sales force. We will never be able to hit the numbers we're supposed to hit because you've made this too restrictive and too hard."
Then there's the other end of the spectrum, where usually at the same bank you'll have the finance, the treasury folks saying, "Look, they're off the reservation. They're already doing things that are way out of bounds. And so we need to bring some more law and order to the way that we price deals. We give away too much, there's too many exceptions, we price too cheap." You hear both sides of that, and of course the answer is usually neither extreme. The way the Bain infographic sums it up is that disciplines and the right tools help sales people preserve economic value. There has to be some discipline, there as to be some accountability around pricing.
A lot of that has to do with how do you incentivize. We've mentioned the Wells Fargo cross-selling thing a couple of times on this podcast, but it's because we hear so much feedback from banks about it. Because banks are now struggling, well Wells Fargo was this bank that was fantastic at cross-selling. They simplified to their Eight Is Great mantra, right? Eight products for everybody was the way you would cross-sell. I think that's where you start to get into the ... if you start to make it more complicated, more restrictive than that, that's where the sales force starts to push back and say, "Look, this is too many rules, too much complication." There's a nice balance in there somewhere, and that's really where you have to have someone own that function, play that middle ground to where they can be not in either one of those silos and really make pricing effective.
Those two really jumped out, they're ones that we talked about in the book. We talk about them almost every day with bankers. Pretty much every implementation we do, it's an issue that we have to tackle over and over again. It's kind of the essence of pricing struggles for banks.
Jim Young: Yeah. I was going to say, if banker are listening, you should take comfort, Bain's infographic is for B2B pricing, so you're not alone.
Dallas Wells: Yeah, exactly.
Jim Young: These sort of things that Bain was touching on are ones that clearly touch a lot of industries, banking included. For that reason, I definitely encourage people to check it out. I think it's just at bain.com/infographics/pricing. Again, we'll have the link to it in the show notes. Some general ideas about pricing that again definitely apply to the banking industry.
That will do it for us today. Thanks for listening. If you'd like to learn more, visit our resources page at explore.precisionlender.com. If you like what you've been hearing, make sure to subscribe to the feed in iTunes, SoundCloud, Google Play or Stitcher. We love to get ratings and feedback on any of those platforms. Thanks for listening. Until next time, this has been Jim Young with Dallas Wells. You've been listening to The Purposeful Banker.

About the Author

Maria Abbe

As a Content Manager here at PrecisionLender, Maria develops the messaging, stories and content pieces for prospects and current clients – showing them the value in PrecisionLender. Her passion for serving others is evident as she leads the volunteer program here at PrecisionLender. Maria’s ability to be organized and constructive, along with her ability to be practical makes her an exceptional addition to our team.

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