Price and Product Integration in Mergers
2012 saw the most bank mergers since 2007 as beleaguered institutions look for a way out. Rising competitive pressure has tempered organic growth while tougher regulations have continued to dampen banks’ long-term earning power. These trends, in combination with a soft economy, suggest that the appetite for merger activities in 2013 will be just as strong. But only a handful of these mergers will leverage the full earning potential and growth opportunities expected at the onset of the deal.
Why is that? In many cases, synergies on the cost side are overemphasized, leaving substantial earning potential untouched. At the same time, banks neglect one of the most important aspects of successful mergers: price and product integration. Given that pricing of products and services has the greatest impact on profit, price and product integration is crucial to fully capitalize on revenue synergies and growth opportunities after a merger.
Yet, we often see merged entities coming together with divergent pricing strategies – as an example, one pricing for market share and the other for profits. This is a challenge because in a highly competitive market, such as banking, one firm’s objective to increase market share typically entails decreasing price, which ultimately reduces profit margins and opposes the other’s objective. Such divergent strategies result in an unclear price positioning, which can easily cause mixed marketing messages and inconsistent pricing behavior.
Successful post-merger price and product integration creates a transparent product portfolio that is tailored to the needs of the merged customer base. The newly forged value proposition enables banks to extract a higher willingness to pay from customers, which leads to significant profit increases. To achieve this goal, banks should follow a structured post-merger pricing process that can be categorized into three phases: transparency, optimization and communication.
Before products and prices can be adapted or integrated, it is important to ensure that both merger partners are aligned on a common pricing strategy. In parallel, an extensive perspective on the competitive positioning of the merged entities must be developed. Creating this transparency builds the foundation for robust analytics that are required to develop the new product and pricing portfolio. In our experience, critical product and pricing questions, as the following, are usually overlooked:
- What are the concrete competitive advantages of each merger partner?
- What is their current price positioning in the market? Where should it be?
- Which products and services are directly comparable in terms of price structure and metrics?
- What is the depth of customer relationships across different product categories?
- What is the price sensitivity of different customer segments?
- What is their willingness to pay for certain products, services, and features?
- Which products and services are always used together or separately? How can they be bundled?
- What new packages can be developed to cater to specific customer usage patterns/needs?
- Which products and services were regularly discounted in the past? How much and why?
The answers to these questions as well as other additional information need to be captured in a single, comprehensive data repository, which will then serve as the basis for product and pricing optimization.
With a clear pricing strategy defined and a deep repository of data, the product portfolio can be optimized to meet targeted goals. The earning potential can be fully realized only if the combined set of customers is intelligently segmented and if the product portfolio is adapted to meet the needs of each segment. Successful product and pricing integration is fundamentally based on the following tenets: cater to customer needs, usage patterns, and willingness to pay; differentiate from competitor offers (ideally not directly comparable); and be transparent and clear in customer communication.
This may sound simple at first, but rarely do banks manage to obtain the revenues for the value they offer to their customers – and that’s under normal circumstances. After a merger, the situation becomes much more complex with fewer resources due to competing priorities or staff reductions. Even standard core products such as checking accounts lack transparency for sales and customers. In one case we’re familiar with, a bank still had dozens of different accounts for retail customers, two years after the merger! It was impossible for the sales staff to navigate these products in an effective way.
Migration scenarios must also be considered and calculated based on the data and analyses developed earlier. This will help the bank address switching behaviors, price sensitivities, product penetration and customer acquisition potential.
The final step is the implementation of the new product and pricing portfolio. First, the migration of customers must be thoughtfully planned out. Guidelines must be set based on customer profiles, including usage behavior and product value perception. Insights from preliminary migration scenarios need to be fine-tuned at this point together with Sales.
For example, in past engagements, we have noticed that almost 90% of business checking accounts can be directly switched to the new checking portfolio based on customers’ past usage data without consulting Sales. For the remaining 10%, sales staff negotiated individual discounts that followed clearly defined requirements and procedures. These directives allowed for greater control over the sales staff and greater enforcement of prices.
Finally, to guide the sales staff through the implementation process, executives should provide them with appropriate communication support tools to help achieve their goals. For example, an interactive account finder is an ideal tool to engage customers during the transition process to ensure that the best possible products are selected that meet customer needs. With the proper training and support tools, Sales can effectively communicate the value of the new portfolio.
Mr. Baumgarten and Mr. Wuebker are managing partners and lead the Banking practice at Simon-Kucher & Partners, a global consulting firm specializing in product pricing and marketing strategy. They can be reached at [email protected] and [email protected]. Mr. Chung, senior consultant, is on his team and can be reached at [email protected]. Otto Birnbaum, senior consultant, also contributed to this article.