One of the most revealing and significant findings from our latest study on emerging financial services is that the principle of diminishing return applies to the bundling of financial services.
The principle of diminishing return states that demand is curved and any additional consumption beyond the highest point produces less return. In the case of financial services, the recurring monthly fee consumers are willing to pay for a bundle of services starts to diminish after an average of about three combined services.
Moreover, the study shows that the optimal point for fee revenue typically occurs before the highest fee-revenue point on the curve. To illustrate this principle, let’s examine an actual case of fee-optimization analysis from our study, where the highest fee revenue is achieved by bundling prepaid reloadable cards, online couponing, overdraft protection and person-to-person payment for a total monthly fee of $12.09.
However, the optimal fee-revenue point occurs after bundling only the first three services – prepaid reloadable cards, online couponing and overdraft protection – at a monthly fee of $11.85. The incremental fee revenue generated beyond the optimal point diminishes significantly and adding the fourth service, in this case person-to-person payments, will not generate enough additional revenue to cover the cost of providing the added service.
Another compelling argument in support of fee-revenue optimization through service bundling is the finding that many consumers are willing to pay a higher overall monthly fee for the optimal bundle of services than they would for each of the services individually. For example, study respondents indicated they are willing to pay an average of $4.27 per month for a prepaid reloadable card, $3.35 per month for online couponing service and $3.11 per month for overdraft protection service. The total fee amount of these three services individually comes out to $10.73. However, when these three identical services are optimized in a bundle, the total monthly fee amount is $11.85 – a premium of $1.12 or 10%.
Clearly, service fee optimization makes sense and can be very profitable. There are many combinations of optimal bundles of services featured in the study. Each optimized bundle consists of an average of up to three specific services generating average fee revenue of $10.12 per month. Taking into account another finding from the study that 68% of consumers desire these services, an institution can generate an average of $120 annually in recurring fees from two-thirds of its customer base.
Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, which provides competitive research and analytics to financial institutions. He can be reached at [email protected].
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