Monday, December 8, 2008

Case Study: Making pricing decisions

[In this true story, names have been deleted to protect confidentiality. Rather than referencing the country’s currency, I use the abbreviation “C.U.” for “currency unit.”]

“We know why people drop out of our program – price,” the MFI’s senior manager said. “The banks have lower rates than us, but our costs are higher. We’re considering lowering the interest rate for our individual loan program in the third or fourth cycles. What do you think?”

“Are clients dropping out because of price in the 3rd and 4th cycles?” the consultant asked. It was the consultant's first meeting with this MFI, and before she told anyone what she thought, she wanted to learn more. One thing was already clear, however - the MFI managers were skeptical of marketing. They had never used it in the past and didn't see a reason to start now.

There was a pause. “We don’t know,” the senior manager admitted.

“Then that might be a topic for research. I’d be interested to know exactly when the price factor causes people to drop out. There’s no sense in giving a discount in the third cycle if people are dropping out due to price in the fifth cycle. Have you seen any differences between your individual loan clients with small loans and those with larger-sized loans?”

The consultant explained that different market segments will prioritize certain loan attributes differently. When people consider taking a loan, they’ll look at the loan’s price, speed of delivery, terms, flexibility, customer service, and access/delivery.

Typically, MFIs have found that people with larger businesses and credit needs have different priorities than smaller loan clients. For example, people with larger loan sizes may be more price sensitive, while smaller borrowers care more about the loan officers coming to their business to collect repayments.

One of the branch managers in the meeting spoke up: “Our clients with loans around 20,000 C.U. care first about speed – how quickly they can get their next loan. Clients who take out 1,000 C.U. loans care most about price.”

“1,000 C.U. – that’s your starting loan size, isn’t it?” the consultant said.

“Yes,” replied the branch manager.

“So you’re saying price is an issue with your new clients?”

“Yes,” the branch manager replied. “Once people are in the program, they understand the benefits of the loan and stay with us. Price isn’t such an issue then.”

“Then why are you considering reducing price in the 3rd or 4th cycle, if price is only an issue with new clients?” the consultant asked.

“As a promotion,” said the senior manager.

“But are you promoting something which people don’t care about? Won’t you be cutting into your profits needlessly? It sounds as if this might be a sales issue rather than a pricing issue. Perhaps your loan officers aren’t selling the other benefits of the loan.”

“Oh no,” said the senior manager. “We train our credit officers not to even mention price. They’re trained to discuss the non-financial programs we offer our clients, such as health training and insurance.”

“Do your clients care about those non-financial programs?” the consultant asked.

The MFI’s managers couldn’t answer her. They didn’t have any hard information on what their clients cared about. Instead, they were making strategic decisions, such as pricing, on assumptions rather than on real data.

Here are some questions for you to think about:

1) What sort of information would it be helpful for these managers to have?
2) Where does the pricing decision intersect with marketing?
3) Should this MFI drop its price in the 3rd and 4th cycle?
4) How could integrated marketing help this MFI's managers?

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