Price Concession Management
The active management of price concessions is often neglected
Price concessions often create significant revenue and profit leakage for wealth managers. Over time, customers have received various forms of discounts, rebates and ad-hoc pricing structures. Price and fee concessions have become the norm rather than the exception. Whether it be an issue of inadequate policies or non-compliance with the existing policies, the issue undeniably exists. Our experience shows that margin leakage of 15-30 percent on gross profits is not uncommon, depending on the business unit and product focus.
The current trend towards more price transparency has led to more demanding clients, who are asking for more frequent and greater concessions. We believe the process of granting price concessions is crucial because it directly affects the bottom line while having a disproportionately high impact on the margin. In addition, pricing decisions, which are often the result of a one-time situation, can impact longer-term recurring revenues over a period of years.
Even though the amount of price concession granted correlates to some extent with AuM or total income per client, these concessions often vary greatly across clients that invest similar amounts of assets into similar prod¬ucts. In fact, there are many low-revenue clients that receive high rebates. Occasionally, even negative margins can result due to a lack of transparency (e.g., lowering certain fees below the actual costs). Concessions are often granted in accordance with anticipated future opportunities (e.g., net new assets). However, afterwards they are seldom tracked with systematic monitoring to determine if the expected future assets truly materialized.
There are often many shortcomings in the actual management of price concessions that can leave unrealized opportunities for gains in revenues and profit.
Enhanced price concession management can lead to significant profit improvements
The first step to improving management of price concessions is to create transparency into the concessions being granted. Greater in-depth insight into the current situation can enable the improvement of price manage¬ment strategies. Furthermore, this insight can help to derive tangible initiatives to improve the bottom line as well as to set up an integrated monitoring approach.
- Establish a comprehensive pricing database to facilitate reliable calculations of price concessions and to provide a holistic view of clients
- Deploy pricing tools to calculate gross prices for each product on a transaction level (requires an in-depth understanding of the actual, often very complex, price structures)
- Perform in-depth analysis by product or service, by AuM tier, by advisor, by region, etc., to identify drivers of profitability, evaluate outliers, inconsistencies, high margin leakage areas, margin leakage patterns, as well as current price sensitivity
Understanding the core reasons for why price concessions are granted in specific situations can enable appropriate countermeasures to be launched. Gathering this information is vital to quantify the potential benefit of pricing and profitability management initiatives.
Strategy improvements: Strategic guidelines for price concession management, and pricing in general, need to be formulated based on business strategies and objectives as well as on the insights gained through previous analysis. Following these steps can provide a foundation for price execution and monitoring. Therefore, it is essential to express them in a clear-cut way.
Enhancing price execution: Price execution can be enhanced by defining a set of tangible initiatives that significantly reduce margin leakage. The picture below shows a selection of possible initiatives to increase profitability. These initiatives can be rated according to their effectiveness in supporting strategic objectives. They are then prioritized in proportion to client satisfac¬tion, profit improvement, effort and risk.
While each institution is different, there are a number of high-value practices that have been demonstrated to be effective.
- Implement client advisor benchmarking & reporting
- Eliminate unauthorized price concessions
- Reset price concessions and limit duration
- Chance structure of price concessions
- Include specific margin leakage KPIs in sales incentive systems
- Implement margin leakage reporting
- Define concession structures and limits
- Define profitability targets
- Define objective criteria for concessions
- Provide sales negotiation training to client advisors
- Roll-out price concession profit impact calculator
- Implement competitor benchmarking tools for front office
- Develop tracking system for negotiated terms
Implementing predictive modeling techniques: Most client advisors enter negotiations with little or no objective, fact-based information on which to base pricing decisions. Predictive modeling tools can help estimate a customer’s sensitivity to price and incorporate that into recommended prices based on customer, competitive and market information that can be provided to the client advisor at the point of negotiation, thereby improving the profitability of the client advisor’s overall book of business.
Structuring effective monitoring: A thorough monitoring system for margin leakage over time should point out disruptive developments and the effectiveness of measures taken as well as reveal opportunities for future improvement. An internal profitability and price concession client advisor benchmarking analysis exposes the over- and underperformers, and helps to achieve better results by encouraging implementation of more effective practices across client advisor teams. A tool-based administration of price concession and alert systems indicating violations of rebate directives foster improved price execution.