Price the relationship, not the average.
When cost to serve varies 5 to 10 times across customers, a single blended price is wrong for almost all of them. It overcharges the cheap-to-serve customers, who leave, and undercharges the expensive ones, who stay and lose money. Pricing by channel and segment on real cost to serve reverses that selection, and price is the most powerful lever there is: a 1 percent improvement is worth roughly 8 percent of operating profit.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
In financial services, price should be set by channel and by segment on real cost to serve, not on a blended average, because unit cost varies 5 to 10 times around the mean. Price is the strongest profit lever: as a transversal benchmark, a 1 percent price improvement is worth around 8 percent of operating profit, more than an equivalent move in cost or volume. A blended price overcharges cheap-to-serve customers and undercharges expensive ones, worsening the book through adverse selection. Fees designed on true cost to serve recover the cost of expensive channels and keep the relationships worth keeping.
A blended price selects against you.
Set one price on an average cost and two things happen at once. The customers who are cheap to serve are overcharged, notice they can do better elsewhere, and leave. The customers who are expensive to serve are undercharged, are delighted to stay, and lose money on every interaction. The book does not stay still; it actively worsens, shedding the relationships you want and retaining the ones you do not. This is adverse selection, and a blended price drives it by construction.
ONE TRANSACTION, FOUR CHANNELS, FOUR COSTS
Illustrative. The cost basis for pricing by channel. A fee that ignores this gap prices the branch and the phone as if they were one business.
The strongest lever, used blind.
Across industries, a 1 percent improvement in price flows almost entirely to the bottom line, worth on the order of 8 percent of operating profit, more than a 1 percent cut in cost or a 1 percent rise in volume. It is the most powerful lever a financial institution has, and most use it without knowing the cost underneath. Cost to serve is what makes the lever safe: it tells you which segments can absorb a fee change, which channels must carry a surcharge, and where a price move would simply chase away a profitable relationship.
Design the fee on the real number.
Cost the channel
Load the staff-minutes per branch, call, ATM and digital contact against the capacity cost rate.
Cost the segment
Roll channel and transaction behaviour up to segment, exposing the 5 to 10 times spread.
Design the fee
Set fees and minimums that recover expensive channels and reward cheap ones, not a flat blended price.
Steer behaviour
Price to move customers toward cheaper channels where it suits them, lowering cost and improving margin together.
Frequently asked questions
- How should banks price on cost to serve?
- By channel and by segment, using the real cost each relationship consumes rather than a blended average. Since unit cost to serve varies 5 to 10 times around the average, a single price is wrong for almost every customer. Fees designed on true cost to serve recover the cost of expensive channels and reward cheaper ones, instead of letting digital customers subsidise branch-heavy ones.
- How much is a price improvement worth in financial services?
- As a transversal benchmark, a 1 percent price improvement is worth roughly 8 percent of operating profit, more than an equivalent cut in cost or volume. In financial services, where cost to serve varies 5 to 10 times, knowing the real cost is what makes a price move safe to take without losing the relationships worth keeping.
- Why is blended pricing dangerous in banking?
- A blended price set on an average cost overcharges cheap-to-serve customers, who leave, and undercharges expensive ones, who stay and lose money. The book quietly worsens. Pricing on cost to serve reverses the selection, keeping the profitable relationships and repricing or steering the costly ones.
Make the price move your cost data says is safe.
The Profit Check needs no data upload. It points to where your pricing is most likely out of line with cost to serve, and what a disciplined change is worth.
- Duration
- 12 to 15 minutes
- You receive
- Score, 7 dimensions, sector benchmark
- Price
- Free, no email needed
Proof
A distributor in New Zealand. €1.335M of cost-to-serve made visible, then halved, and 830 loss-making customers brought down to 295.
Read the case study →Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Lectured alongside Professor Robert S. Kaplan at the CFO conference in Amsterdam (2009).
Call +351 910 313 731
