Jeff Judy

Jeff's Thoughts - October 29, 2008

Your Pricing Model

Note: My guest columnist for this issue is Phill S. Rowley, President and CEO of Treasury Management Services, Inc., and a co-founder of The Hurdle Group, Inc. Phill has done a great deal of work on loan pricing models, and in this issue he shares some key factors that typically influence the pricing of commercial loans. More on Phill below.

Every commercial lender follows a pricing model of some kind. Sometimes the model is a sophisticated formula, perhaps managed with dedicated software. Very often it is more a "rule of thumb" in the head of the chief credit officer or senior loan officer.

And the most common model of all is very easy to understand and apply: match the competition!

If your pricing scheme is mostly based on what the competition is doing, you are probably passing up a lot of opportunities to build profits for your institution. After all, you and your rivals do not have identical resources, risk tolerance, customer profiles, or strategic goals. How can copying someone else's pricing, applied under your particular conditions, help you achieve your goals?

Whether it is custom software, off-the-shelf tools, or a simple document you prepare internally, it is worth your while to build an explicit pricing model that goes beyond following the competition. To be sure, the competition's practices have to be considered. Pricing wildly differently from everyone else in your market can be a risky move.

But if you don't at least consider other benefits of a clear pricing plan, you risk leaving a lot of dollars on the table in working with your commercial customers.

Beyond the competition, you should look at your pricing approach with these considerations in mind:

The most important driver of your pricing model should be the needs of your own institution. And your competition is hardly looking after your needs. What you want to achieve, how your people work, what resources you have available, all these play a role in developing your pricing model.

But make it your pricing model. Whether on paper or embodied in software, an explicit, adaptable, and consistent pricing model gives you an edge over your rivals who are just following one another around in circles. If you truly want to be a market leader, some disciplined thought and action around pricing can be a big step toward that goal.

About Phill S. Rowley

With more than thirty years of banking experience, Phill's knowledge is in demand at banking schools across the country. He has held numerous management roles in banking institutions, including chief financial officer and chairman of the board of directors. Add his real-world experience to an educational background in finance, systems analysis, economics and statistics and you can see why Phill has been able to develop sophisticated tools for banks. For more about the PULPS (tm) loan pricing tool, visit The Hurdle Group site.