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By charging borrowers who are not price sensitive a higher interest rate, mortgage lenders can afford to offer customers who are price sensitive lower rates, increase originations and boost profits, according to a new report.
“Traditional pricing techniques such as one price fits all, market based, index based, and risk based all ignore a fundamental component: consumers’ price sensitivity,” TowerGroup analyst Bobbie Britting said in her report, Profit-Based Pricing: Time to Stop Leaving Money on the Table. Profit-based pricing combines risk, cost and customer price elasticity, Britting explains. Customer price elasticity or price sensitivity is equated to what the customer is “willing” to pay for the loan. For example, customers being offered a identical loan products with the same credit scores, LTV, ratios and loan amount range could be categorized in three segments; “A” customers that are content to pay seven percent, “B” customers who decline the offer because the rate is too high and “C” customers who pay the seven percent but would have been willing to pay more, the report says. “Using price optimization, the lender could improve profit margins on all customers in segment C by asking a higher rate,” Britting writes. “It could enhance volume by offering customers in segment B a lower rate, which would still profit the lender.” This pricing methodology factors in historical customer data so that the lender can offer the appropriate price to each segment and effectively increase profit and revenue, the report explains. “Lenders need a fresh approach to pricing if they are to maintain targeted growth volumes and profits,” Britting says. “Now more than ever, [financial services institutions] are in a position to begin properly implementing price optimization or profit-based pricing.” San Bruno, Calif.-based Nomis Solutions recently announced the launch of its price optimization product that monitors, analyzes and optimized price points for its users. The solution can be implemented in less than 10 weeks, is designed to improve profits within three months and has increased return-on-invest ten times over for all of its customers, according to company claims. |
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Paula Parisot is a MortgageDaily.com feature reporter and a blogger at CloserBlog.com who has also worked in the mortgage industry. e-mail Paula at: PaulaParisot@MortgageDaily.com |
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