According to Ennew and Waite, authors of Financial Services Marketing, there are five different types of financial service products: transactional, investment, borrowing, insurance and informational . Of the four p’s in the marketing mix, price, product, place, promotion, ‘price’ is easily the most versatile. Unlike a product’s promotional strategy or placement, price is often times multifaceted and also the most difficult for consumers to understand. For this paper, price refers to the value of a good or service for both the buyer and the seller in a market exchange . According to Professor Hooman Estelami of Fordham University, the difficulty with price arises for two main reasons: its complexity and its multidimensional aspects . Take for instance a simple auto loan; terms and payment options such as balloon payments and wear and tear penalties may be confusing to consumers .
This essay seeks to outline and analyze the factors affecting the pricing of financial services. To begin, the importance of price to both consumers and to suppliers (often times the bank) will be outlined. This will be linked to the seven factors that affect pricing including: competition, legislation, price sensitivity and awareness, nature of the product, elements of cost, risk, and remuneration of equity capital . Finally, different pricing methods as well as a detailed look at explicit and implicit pricing will be outlined along with their advantages and disadvantages.
The Importance of Pricing
Price has great importance to both the consumer and to the bank. According to Ennew and Waite, there are five main reasons that price is important to the consumer. Price is used to: compare, value, indicate quality, represent cost and influence amount purchased . For instance, a customer may look at the price of a Toronto Dominion (TD) savings account versus the cost of a Bank of Montreal (BMO) savings account . The consumer assumes that both accounts are about equal, and therefore uses price to compare the two. While the TD account may cost more per year, it may also be of greater value to the consumer because it offers bonus air miles. Price also indicates quality, as often times higher quality is associated with a higher cost. The price of the account also represents the cost. The TD account may be priced at ₤10/month, meaning an explicit total cost of ₤120/year to the customer. Lastly, price will influence the amount purchased. The more expensive and less necessary a service, the less will be purchased.
Price is also of great importance to the bank as it indicates profit, demand, competitiveness, adjustability and variability in the product life cycle . Price will determine the demand for a product and in turn the profit that a bank receives. Because it is so versatile, price is easily adjustable and can be matched to the different phases of the product life cycle based on market factors such as demand and competition. But how do banks determine the price for their services? The following section will outline the seven factors affecting pricing.
Factors affecting Pricing
Competition greatly influences both how the bank prices their service and whether customers will purchase the service. This is due to two reasons. Firstly, banks often times provide ‘perfect information’, disclosing prices associated with different services. Because of this, a customer can simply look online at both competitors’ websites to determine which bank offers the best service at the cheapest price. Secondly, most services are easily replicated. Because of this, certain services such as chequing and savings accounts are very generic leaving little to differentiate them besides price .
Four key pieces of legislation exist to protect customers in the...