Just in time for SIBOS, a report on
pricing by consultancy Simon Kucher concluded that the industry has
to date failed to take advantage of consumers’ willingness to pay –
but also found that the payments value chain is now focusing on
profit growth instead of market share growth. Duygu Tavan
reports
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Profit growth is now a more important strategy than market
share growth for the cards and payments industry. This is the
conclusion of a survey by pricing consultancy Simon Kucher, titled
The Hidden Champions of Power: Pricing in Consumer Payments –
Insights and recommendations for Smart Profit Growth.
The consultancy asked participants from the
industries of card issuing, schemes/associations, merchant
acquirers, processors, mobile payments providers, online payments
providers, cash product manager, cheques product managers and
infrastructure providers among others. The majority (82%) of
responses came from Germany, the UK and Italy, while a fifth came
from other European countries, as well as North America, Asia and
the Middle East, thus giving the survey findings a European
bias.
The study analysed attitudes and the opinion
of industry players across three pricing pillars:
1) price
strategy
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By GlobalData2) price
setting
3) price
implementation
The ultimate conclusion is that the industry’s
approach to developing and implementing a more robust and effective
price strategy provides strategic and advantageous opportunities
for the players. Key to that is a focus on profit growth rather
than market share growth and there is a “major” opportunity to
incorporate value-based pricing methods into existing pricing
strategies throughout the whole cards and payments sector.
A big change from the past
The conclusion is that the industry’s approach
to developing and implementing a more robust and effective price
strategy provides strategic opportunities for players in the
market. Key to that is a focus on profit growth rather than market
share growth and there is a “major” opportunity to incorporate
value-based pricing methods into existing strategies throughout the
whole cards and payments sector.
For Ben Snowman, Simon Kucher’s director
responsible for banking in the UK, the industry’s focus on profit
growth over market share and revenue growth is “a big change from
the past”. He explains that this is a big change: “In the past
there has been a lot of M&A activity to achieve volumes and
there’s been a price compression to get transactions.”
“Volume growth is not about profit. The
strategic priority is market share. When you look at it from the
context of profit, it’s a whole different set of levers and short
profit is revenue, is cost. It’s the same economics. But price is a
hugely important factor in terms of profit. What this means is,
from a pricing perspective, the consumer payments industry has cost
plus transaction at its heart because of the interchange rates.
That is typically how the merchant acquirers price and that is
obviously how issuers have funded loyalty schemes, for instance,”
Snowman says.
“So as the industry seeks profit growth and not
volume or market share as such, it is looking to consolidate its
position to improve their profit and loss position. Pricing becomes
a much more important strategic lever to explore because it is not
so much about risk-based pricing, cost-plus pricing or ‘me-too’
type of pricing – all of a sudden, you start introducing the
concept of value-based pricing which is tapping into consumer
willingness to pay and thus achieving the optimal point of fair
value exchange.”
Industry does not understand value of
service to customer
According to the survey, the industry has
recognised the importance of pricing – which they need to explore.
The survey also proves that the industry has failed to tap into
consumers’ willingness to pay, because they do not fully understand
the value of their service to the consumer.
“[The survey findings] are quite a strong
message to the industry,” urges Snowman. “When you start to
consider value pricing, you begin to move away from the traditional
commodity trap.” Such a move is of course brave, as Snowman admits,
because the industry – obviously – wants to generate profit.
“What we are saying in this paper,” emphasises Snowman, “is that
value-based pricing is the way forward.”
The opportunities to improve pricing can be
categorised as:
1)
Strategic price management: Each organisation
needs to have a price strategy, including a stance on key strategic
trade-offs such as profit or volume growth targets. The price
strategy should also include guidance on price positioning in
relation to that of competitors, principles for using price models
and pricing decision.
2)
Analytics and tools for price setting: The survey
found a lack of rigorous approach to pricing and an overreliance
among industry players on their gut instinct. But the report urges
companies to collect competitor, consumer and internal data
throughout the pricing cycle in order to get it right; these stages
include current competitor prices, client priorities, the change
process and reaction of competition to price changes and the level
of success in price implementation. The report argues that only
then a meaningful data analysis can take place.
3)
Pricing operating model: Price must be considered
in each business function to enable cross-functionality and
co-ordination. Each business function must also be aware of its
individual role in the pricing of products. A successful business
will be able to co-ordinate the implementation of price changes
across the business channels and initiate marketing campaigns
accordingly. This, however, is currently rare in the industry.
4)
Sales force optimisation: Obviously, a price
change is most successful if the sales staff are engaging clients.
Two key actions are required for this: value statements to
articulate the benefits of the new price and proper training to
respond to challenging doubts or questions by customers.
5)
Post implementation reviews: Of course, market
conditions will prove whether a price implementation was successful
or not. Either way, the change will have an impact. Thus, KPIs must
be developed before the price implementation and must be measured
afterwards.
Align corporate targets with customer
sentiment
An example to visualise the difference in these
pricing strategies is that of a mobile payments provider that
offers various types of m-payment services including remittance and
NFC. If consumers adopt the services, it is proof that these
services are important to them. With a high number of m-payment
services that could be developed, the vendor would also cover areas
its competition may not – positioning itself at a strategic
competitive advantage. “And that is what customers are willing to
pay for,” says Snowman.
He has another example:
“If you are a merchant acquirer and you are
focused on profit rather than revenue growth, there are clear
differences that translate into your business model. If you are
about profit, you are probably positioning yourself with a high-end
provider, which means that you are going to offer a variety of
services because you are a premium provider.”
Price is not just a number. It can be a metric
to control a company’s position in its market, but it can also
manage to enter new markets, beat innovation from competitors and
align its overall corporate strategy in accordance with its client
strategy to distinguish itself from competition. Pricing so
far has been opportunistic and reactive, but the industry needs to
be more proactive by weighing up corporate targets with customers
sentiment.
