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Price Differentiation for Enhancing Revenue and Profitability in Community Banking Neil Stanley, President, Bank Performance Strategies Banking is in many ways a very simple business. Bankers seek to make a living by managing, and helping others manage, the ultimate commodity – money. Our industry helps people who: • Need money they do not yet have; • Have money they do not yet need; • Want payments made simply as they expect; and • Want accounting and documentation for everything regarding their money. Those needs and wants are not in danger of becoming obsolete. However, it seems to be increasingly difficult to produce a profit in this line of business. Is this because the business of dealing with a commodity is inevitably a commodity itself? In other words, are banking services just a commodity – a mass-produced, unspecialized offering? If so, it seems apparent that the low-cost provider will be the ultimate winner. This assumption seems to favour those operations with the greatest advantages of scale. But, could there be something else of substance at work here? Consider the proposition that not everyone values the same things when it comes to their money. Certainly, we would all recognize that every rational person would rather have more money than less. However, there is more to financial decisions than that simplistic ‘more or less’ comparison. There is always a question of other limited resources – information, time, energy, and effort, to name a few. Different people, different prices Bankers often fall into the trap of assuming that everyone manages money with the same precision and accountabilities as a banker. They do not. Most people are not paid to manage money professionally. They think and act differently toward money than a banker. Therefore, bankers who presume that their clients will make the same financial decisions as they would are often surprised that customer decisions reveal the existence of other considerations and priorities. Given this spectrum of considerations and priorities, we find that rational people will react differently to financial service offerings, with some people foregoing objectively attractive prices and others accepting objectively unattractive prices for the exact same services. In this environment, is it fair to charge different people different prices? What are the motivations to differentiate prices? Are they legitimate? What are the consequences? Most of us desire to treat people fairly. We want to be properly compensated for serving Relationship Banker: Journal of Product and Pricing Lifecycle Management, Summer 2014 41