Monetizing Change: What Wealth Managers Can Learn from Other Industries

November 04, 2019

Innovators thinking about an idea

Wealth managers are under pressure as clients become increasingly price sensitive to management fees. Are lower revenues the new status quo, or is there a way for wealth managers to mitigate this? Pricing experts Max Biesenbach, Hrishi Rajadhyaksha, and Nikita Gupta share five key monetization lessons.

The private banking and wealth management sector is facing margin pressure. The requirement that banks disclose their fee structures is leading to decreasing fee income, and we see a clear reduction in transaction activity as a result of a more uncertain investment scenario. Against this backdrop, the recipe for successful monetization strategies is not an obvious one. However, rather than reinventing the wheel, there’s a lot that wealth managers can learn and borrow from other industries.

Five golden rules for monetizing change
As consumers, we come across successful packaging and pricing structures on a regular basis. Best-in-class companies in a wide range of industries have designed their offering and value proposition in a way that fully taps into willingness to pay. Here are five lessons for wealth managers:

1. Pricing needs to address different segments' needs

At a fundamental level, Netflix probably understands your clients better than you, their bank. That might not seem right, but let’s compare offerings: overall, the streaming service does a better job of identifying and catering to individual needs than the one-size-fits-all offer that most banks present to their clients. Netflix recognizes that the “average customer” doesn't exist, and so ensures the loyalty of a diverse customer base through smart packages. Its Basic plan has limited features and can only be used in low resolution on a single screen. Standard allows two screens in HD (perfect for couples), and family-friendly Premium has four HD screens with extra perks. This way, Netflix Basic remains affordable for viewers on a budget, but through Netflix Premium, it can request a higher price. For customers who no longer need Premium, the Standard plan acts as the downgrade path and is a safety net. So ask yourself this question: In five years’ time, how many of your clients will still be subscribing to Netflix, and how many will still be with your bank?

Lesson for wealth managers: We recently helped a wealth management client apply this logic to their one-size-fits-all advisory offering. Today, their Basic solution only focuses on buy and hold clients, who typically make one or two trades a year. For clients who want to discuss their investment strategy on a more recurring basis, there's the Premium middle offer, along with the Advanced offer which includes several exclusive services. The core idea of service level differentiation is especially valid for wealth managers looking to cater to diverse needs of wealthy clients seeking investment advice.

investment strategy for a client


2. It is more important how you charge than what you charge

Today, trucks fitted with Michelin tires are likely equipped with GPS technology, with tires paid for on a “pay-as-you-go” basis. Michelin used to charge customers a fixed price per tire, until they invented a new tire that would last 20% longer. The initial idea was to charge around 5-6% more for this added value, but due to the increased longevity of this new product, Michelin tires would need to be replaced far less frequently, impacting the bottom line. Instead, the company decided to explore alternative monetization models. By switching to a price-per-kilometer model, known as Michelin Fleet Solutions, today they continue to fully monetize added value of their tires.

Lesson for wealth managers: The way you charge can dramatically impact revenues. Your choice of price model should reflect your clients' usage patterns. For example, customers with low transaction behaviour are more likely to choose a brokerage model, whereas customers with high transaction behaviour typically choose the ticket fee or all-in model. Understanding how your customers use your services through meaningful customer segmentation will enable you to implement a pricing model that best suits your customer’s needs.

3. Pricing needs to consider irrational consumer behavior

You’ve been invited to a friend’s for dinner and you need to pick up a bottle of wine. Now in the supermarket aisle, you’re presented with three different choices of red: €15, €19, €25. You’re unfamiliar with the brands and quality, so you just pick up a bottle. Which one do you choose? While a sommelier will be able to distinguish the varying regions, grape blends, etc., the majority decide purely based on price and go for the middle. The cheapest option could mean appearing frugal, while the most expensive option might be a complete waste of money. This is known as the compromise effect, and is just one example of the many psychological pricing tactics that companies can apply to benefit from irrational consumer behavior.

Lesson for wealth managers: The same principle applies in banking. We recently supported an online investment company with their choice architecture, increasing their number of options to three clearly differentiated plans. The very limited Basic option (1 trade per month) served to nudge clients to the more valuable options. A middle choice included several attractive features at a slightly higher price point to Basic and was the most popular among clients. The Premium plan catered to the very specific needs of frequent investors and monetized the extra value they received.

Kinds of investors

4. How you communicate prices DOES matter

One common way people judge a city by is the price of commodities – and for tourists, that’s usually beer. This might be tricky, however, if you are comparing two very well-known German cities: A beer at Oktoberfest in Munich will set you back around €11.30, whereas at Karneval in Cologne it’s just €2.50.

At first glance, the Munich price seems outrageous, but leaves you pleasantly surprised when the bar staff bring an entire 1 liter serving to the table. In Cologne, on the other hand, a glass of beer will cost you a mere €2.50. You will probably need to drink around ten of them to reach the same level of enjoyment though – a standard Kölsch comes in a 0.2 liter serving, and the bar staff will keep bringing more until you cover an empty glass with your beer mat (useful to know for anyone planning to visit Cologne during Karneval celebrations).

So which city has the most expensive beer? Intuitively, you might think Munich, but beer in Cologne works out at €12.50 per liter – a premium of €1.20 over Munich. Still, if you go out onto the streets of Cologne and do a quick survey with the locals, they’ll swear to you that their city has the cheapest beer in the whole of Germany.

Lesson for wealth managers: Breaking down fees into smaller units is a quick-win when it comes to positively influencing price perception. An annual minimum advisory fee of €5,000 might seem expensive, but break this down into quarterly charges of €1,250 and it becomes more palatable for the client.

5. Sales is where the pricing rubber hits the road

Imagine you’re picking up a pizza at your local takeaway. Both you and another customer have ordered large Hawaiians with no extra toppings, but at the counter you realize you are charged €2 more. When you ask the cashier about the price difference, they explain that they always charge people in jeans €1 more, but people who have green shoes €1 less. For you as a customer, this makes no sense at all, and you consider visiting a new establishment in future. In banking, this would be similar to charging one of your customers €5 per trade and the other €10 per trade for an identical service and transaction amount. This just wouldn’t be fair. 

Lesson for wealth managers: You need to treat customers fairly. This means training the sales team on how to properly enforce your target prices and justify differences between clients who book similar AuM levels. For example, Simon-Kucher’s digital revenue and discount management solution, PricePro, helps banks to keep track of pricing decisions, providing bankers with a comprehensive view on clients' revenues and discounts as well as full visibility on the economic impact of discount decisions. In addition, Management receive detailed guidance on pricing decisions with clear KPIs, as well as dedicated discount and revenue reports.

Wealth managers cater to financial needs of their customers in quite niche ways. Even though the service offering and value proposition may be significantly different to consumer companies like Netflix or tire manufacturers like Michelin, core pricing lessons from leaders across industries still translate very well. In fact, as both the regulatory and investor landscape evolve, wealth managers will inevitably be forced to be more innovative with their offering and pricing strategies to grow revenues and stay relevant to their target audience.