Profitability in a mature business

A new organizational structure

An international financial service provider, Bank, was offering merchant services to it’s customers though subsidiaries in more than 20 different markets. The senior business leader of a product line, Mike, had recently been placed in charge of the technology aspect of merchant services, the provision of payment card point-of-sale terminals and online payment gateway, while the other services, including deposit accounts and foreign exchanges, were now managed by another senior leader, Charles.

A history of under pricing

Under this new management structure, it was identified that the technology services were likely being priced below cost. The irregular profitability and poor average-revenue-per-customer created an issue that had to be addressed, but without a detailed understanding of the causes, it was difficult for Mike to achieve consensus and get support on pricing changes. Mike tasked a member of his team to identify the pricing changes necessary, design a new pricing model to ensure better pricing habits were adopted and support the negotiations with the business leaders in each country to the necessary price changes with current customers.

Balance sheets, contracts and customer reports

From the Bank’s balance sheets, it was clear that the profitability margin was too slim to cover all operating expenses and generate a profit margin allow for a dividend to be paid to the Bank’s shareholders. The information available from the balance sheets was not sufficiently granular to identify which countries and customers were responsible for driving this trend.

The technology solutions used by the Bank’s customers were provided with a series of different partners with the payment processing backend outsourced to a technology provider and reports from these partners were accurate and reliable for information on revenue-per-customer , sales-per-customer and transactions-per-customer for all customers across all countries. This information together with a clear set of contracts with each partner that identified how the Bank was charged per-transaction, per-customer and per-sale allowed for an accurate calculation of the cost-per-customer.

With the revenue-per-customer and the cost-per-customer in hand, accurate customer pricing was developed along with a new pricing model. The analysis revealed that the customers with the highest sales in many countries were being given prices that generated negative profitability and that this was the causal factor for overall slim margins on the Bank’s customer portfolio.

New prices for existing services

The pricing practices that were driving this trend were often done unknowingly by the business leaders in each country who were responsible for setting the prices. The banks balance sheets were not clear enough in each country to support these leaders in making clear pricing decisions and the pricing model that was used previously underscored costs, while favouring other Bank services.

A series of new prices was proposed to each of the country leaders who provided insight on which customers could handle these increased prices and which ones couldn’t. After a few scheduled talks, the country leaders informed the Bank’s customers of the pricing changes and adopted the new pricing practices.

Profitability target achieved 

93% of the customers accepted the changes without issue, 4% renegotiated for discounts on other services, and 3% left the bank for competitor services within 3 months of the pricing change. Mike knew that some customer loses were to be expected and this was inline with the estimates provided for attrition.

The overall target of the endeavour was to increase total profitability to 30-35% over operating expenses specifically related to providing the technology services and generate an increase in annual profitability of 1 million dollars Canadian sourced from all countries. The measured increase, after a year, was that profitability had increased by $1.02 million with a 32% revenue over expenses operating with no significant change in customer attrition or growth from the new pricing practices.

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