In many industries, price increases are currently being considered or carried out. This usually happens due to rising raw-material prices and/or losses during the pandemic. At first glance, that is not unusual. But when, in the past, one raised the topic of price increases with those responsible, the fears and worries about carrying them out were usually very great. In the following, we want to show why those responsible find it much easier to raise prices due to external factors than due to increased value based on their own performance.
The trigger for this post is that our own bank, the ZKB, has increased the price for the account-management fee from the previous 4 CHF per month to 7 CHF per month. That is a price increase of 75%. This price increase is justified in a plain letter by the fact that the bank has continuously developed its offering further in recent years. We discussed this point internally. We too have constantly developed our offering further in recent years, investing heavily in digitalisation and internationalisation. Should we also increase our day rates by 75%? We can reassure you at this point. We are not introducing expensive chatbots and continue to use digitalisation to achieve optimal added value for our customers. The fascinating situation in the banking industry is that most customers will simply accept this price increase. For one thing, banking offerings are characterised by low involvement. Companies simply don’t care about a price increase of 36 CHF per year. For another, changing your bank is laborious, due to numerous rational binding elements (lock-in). That the ZKB is carrying out the price increase now is probably also owed to the general mood — since prices are currently being increased in many industries. What moved us to this post, besides the fact that we will soon have no money left, is the manner of the price increase.
As a first step, we would like to address the concept of the value stack (note: it has nothing to do with electricity). Often, when we raise the topic of pricing in projects, we find that those responsible aim primarily at steering the optimal selling price for an offering. That is certainly also an important result of a pricing project. For us, however, it is at least equally important to understand what influence the individual value components of an offering have on the customer’s price perception. Every offering can be broken down into different components, and every customer will assign a different relevance to the different components. Understanding this ‘value’ precisely and, above all, quantifying it is an important customer insight for companies.
If we look at the ZKB example again. The bank presumably increased the prices on the basis of internal cost considerations and a competitive comparison. Even after the price increase, the ZKB’s prices are still relatively attractive. These two forms of price analysis and price determination are very cheap and easy to carry out. In internal meetings for decision-making, the results are also easy to argue. What is sad is that a company like the ZKB, which in 2021 achieved a record profit of CHF 941 million, seems to possess little competency in the area of value and behavioural pricing. Yet customer-centric pricing offers enormous potential, precisely in the case of a price increase. However, building competencies for customer-centric pricing is challenging.
Using value and behavioural pricing for a price increase
We recommend that companies, as a first step, understand the customers’ value stack as precisely as possible, if possible by means of choice-based conjoint. The measurement can now be carried out very easily with online tools. What remains challenging is that companies have to focus on a few attributes and levels. Here we find that in most companies there is very little knowledge regarding the elementary dimensions of the value stack from the customer’s perspective, and attributes are put into the measurement that have hardly any relevance from the customer’s perspective.
Let’s take the banking example. Is it really apparent to all customers what investments and improvements the ZKB has made in recent years? And the even more exciting question: is every improvement equally valuable for every customer? In tendency, both questions can be answered with a rather ‘no’. For example, it annoys us that the credit card is not directly connected in online banking. Other customers will raise other points of criticism and value the contribution of the bank’s individual offering attributes differently. So one could have addressed different segments and their value perceptions in the communication, instead of writing to all customers — we rock, you pay.
For the further explanations, let’s assume that the available customer data would have made it apparent that customers increasingly value the worth of the ZKB’s numerous changes. If such robust customer insights regarding the value stack are available, it is important to use the insights of behavioural pricing for the implementation. For example, a preceding campaign could have presented the central value-increasing activities for customers comprehensively, in order to subsequently gain more acceptance for the price increase. A single sentence in a letter that simultaneously presents a 75% price increase is not ideal. Customers only see the price, and negative emotions must arise. A second example is the presentation of the price increase. Fundamentally, price models should show the highest price on the left side and the lowest price on the right side. This recommendation is based on the insights on loss aversion. With the ‘high price left / low price right’ presentation, customers tend more towards the high price in the purchase decision than when the prices are presented in the reverse arrangement. For its price increase, the ZKB put the new (high) price on the left side and the previous (low) price on the right side. Unconsciously, this leads to the manner of presenting the price increase influencing customers’ perception more strongly than if the presentation had been reversed. That the announcement was communicated on a simple grey sheet helps environmental protection, but doesn’t make the value perception any better either.
Conclusion on the price increase
For the ZKB, this action will be successful. Most customers will accept this price increase. So from July, the bank makes 75% more profit on the business-customer account. This raises the critical question: why should such a company build ‘expensive’ pricing competencies if it can also be done simply? Many other companies can now cite the increased raw-material prices and/or Corona for the price increase. But quite apart from the fact that value and behavioural pricing offer enormous profit-increase potential for companies — one could also imagine a more complex pricing model for a bank, based on price differentiation for different segments. If it is now so easy to carry out a choice-based conjoint, isn’t this topic also about leaving the amateur league and tackling promotion to the Champions League? Or, put differently — doesn’t it scratch a little at the honour of companies to possess so little competency in the area of customer-centric pricing?
