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Asset financepricing review

Pricing action plan for improved profits

Best practices for setting residual values

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Experteye reports European companies bullish about car residual values

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expansion

Colin Tourick assesses ideas for better pricing performance

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The pricing action plan for profitChanging your pricing policy may well be your most powerful lever forprofit. Make your action plan now!

So you want to improve your pre-taxprofits?

Well, you might decide to introduce a new ITsystem that would allow you to do morethings, introduce more products and be moreeffective than before - at a cost, of course. Oryou might introduce a new quality-management system or increase yoursalesforce or cut overheads or other costs.

These are the ‘levers of profit’, the aspects ofyour business that you can change togenerate more profit.

Generally speaking, if you pull one of theselevers it will have a modest effect on yourbottom line. You can often generate a muchbigger impact, with much less disruption tothe business, by changing your pricing policy.If you can implement a successful pricingchange you will improve your volumes andmargins simultaneously, with little disruptionand at little or no cost. Do it successfully andyou will enjoy the benefits immediately,without generating a negative response fromstaff or clients. Pricing is the most powerfullever of profit.

In previous Pricing Reviews we have looked

at the steps that asset finance companieshave taken to develop their businesses and inparticular how they have improved (or mightimprove) their pricing. In this article we willmove beyond that and set out an action planfor asset finance companies that want toimprove their pricing. The steps to follow are:diagnosis; decision; preparation; get buy-in;trial; implement and monitor.

1. Diagnosis

First, have a look at the way business ispriced at the moment. How are pricescalculated? Is it done centrally or byindividual salespeople? What insights aregained from the market to help guide pricing?Have a look at the range of prices quoted forthe same type of business to the same typeof customer; are they similar? If there is awide variation you have prima facie evidencethat something is going wrong.

Which customers get the lowest prices andwhy? What costs are incurred as a result ofdiscounting or other giveaways, e.g. givingaway costly contractual points during thenegotiation? Do the most valuable clients getthe biggest discounts? When pressed by a

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Ideas for better pricing performance

The adoption of scientific method within asset finance companies has been one of the defining characteristics of the growth of the sector. Science is brought to bear in credit analysis, performance measurement, quality management, IT systems, the measurement of marketing activity, predicting future asset values and maintenance costs - in fact in almost every area of management.

However in many asset finance companies the function of pricing – deciding how much to quote the client – is still carried out in the same way it was carried out 20 years ago, using ‘gut feel’ and ‘experience’ rather than scientific method.

Where pricing departments exist they are likely to be involved in working out how much it will cost the company to fund the asset (often using complex tax-based discounted cash flow models), or the minimum price that needs to be quoted in order to cover internal costs (including risk costs), or maintenance budgeting or used asset price projections (the calculation of likely depreciation costs).

However these are actually costing activities which are designed to work out the cost of the deal, rather than pricing activities designed to calculate the optimum price to quote to the client – the price which is as high as possible, consistent with maximizing the probability that the client will accept the quote.

When looking to boost the bottom line, management attends to cost-reduction before focussing specifically on trying to actively improve pricing. But it is definitely worthwhile looking at pricing afresh and if you devote internal resources to price improvement you are likely to get a good return for the time spent.

According to Deloitte: “Pricing projects normally deliver faster and better bottom line results than cost-saving projects. Most pricing projects give a return of

investment (ROI) of 300% and improve gross profits by more than 10%”.

This article offers a series of questions, thoughts and observations derived from best practice in other markets, which may be helpful to executives in asset finance companies looking to generate more profit. The question is whether the best way to do this is to increase prices to generate more margin at the cost of lost volume, or reduce prices to stimulate volume at the cost of lost margin.

Elasticity of demand

Measure the elasticity of demand for each of your products at every price point. This should be carried out at a granular level. This could involve a lot of work but it’s essential because the client will be asking for a specific quote and will shop around for a quote on the identical deal.

So, for example, if yours is a vehicle leasing business the elasticity calculation has to be done for every make and model of vehicle, at every term and mileage (km), for each type of financial product and for each payment profile on which you regularly issue quotes.

Discount management

Look at the different discounts your salespeople offer and clean up this area. Produce a volume/discount chart. A discount ‘jungle’ cannot usually be justified. Target discounts at important customers, biggest buyers, best credits and so forth. Introduce pricing structure and discipline. Coach and train sales people and those involved in pricing as to the optimum way to set prices, using data rather than subjectivity as the starting point. Make sure you do not lose control of discounts. If there is scope for salespeople to flex prices, always measure the results.

Professor Colin Tourick

Forecast Car ResidualsRise as Optimism Returns

Changes in residual value (RV) forecasts, SMR costs and lease rental rates to January 2014Forecast residual values Forecast service, Current rental rates

maintenance and repair costs

3 month 12 month 3 month 12 month 3 month 12 month

change change change change change change

France +0.2% +1.7% +0.7% +2.1% +2.0% +1.9%

Germany +0.9% +0.4% +0.8% -2.7% -0.8% -2.5%

Italy +1.1% -0.9% -0.1% -8.2% +1.9% +0.6%

Portugal +0.7% -2.6% +0.2% -2.7% -1.2% -4.9%

Spain -0.1% +1.0% -1.4% -4.1% -0.9% -1.3%

UK +2.8% +7.3% -0.1% +0.4% -0.2% +4.0%

It appears that fleet lessors across Europe arebecoming increasingly optimistic about futureresidual values. To end, January we sawlessors increase their forecast RVs by 2.8% inthe UK, 1.1% in Italy, 0.9% in Germany, 0.7%in Portugal and 0.2% in France. Spain reportedthe only reduction and this was by just 0.1%).

These figures are collated by Experteye’sEuropean Leasing index survey which tracksforecasted residual values (RV), servicing,maintenance and repair (SMR) costs and rentalrates in six European countries using datasupplied by major leasing companies.

Looking over the past 12 months we can seethat at one extreme forecast RVs rose by 7.3%in the UK, and at the other extreme they fell by2.6% in Portugal.

Forecast SMR costs have also stabilisedsomewhat over the last three months, havingsuffered significant falls in Spain, Portugal, Italyand Germany in the previous nine months.

Rentals seem to have stabilised somewhat tooin the last three months, having been quitevolatile in the UK, Portugal and Germany inparticular in the previous nine months.

Professor Colin Tourick is a management consultant, former MD of Citibank's fleet leasingbusiness and a 34 year leasing industry veteran

Editor: Professor Colin Tourick Editor in Chief: Brian Rogerson© Asset Finance International, 2013. All rights reserved. The contents of this publication may be downloaded from Asset Finance International and are intended only for the individual use of thenamed individual who has registered to receive it. Contents are for informational purposes only. No liability will be accepted for any omis­sions or inaccuracies. No copying, whether whole or in part, transmission by any forms or means, electronic or otherwise is permitted.

• The comparisons are for vehicles with a contractduration of 36 months / 90,000 KM• Twelve month comparisons show change sinceFebruary 2013• Three month comparisons show change sinceNovember 2013. • Rental rate changes compare the rates in effect atthe time of the survey with those in effect three ortwelve months ago.

• RV and SMR changes show the change inparticipating leasing companies' forecasts of residualvalues and maintenance costs over the period.The Experteye European Leasing Index reports ontrends in leasing company forecasts, plus currentrental rate movements, covering representativeversions of up to 250 vehicles in the six markets.

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The pricing action plan for profitChanging your pricing policy may well be your most powerful lever forprofit. Make your action plan now!

So you want to improve your pre-taxprofits?

Well, you might decide to introduce a new ITsystem that would allow you to do morethings, introduce more products and be moreeffective than before - at a cost, of course. Oryou might introduce a new quality-management system or increase yoursalesforce or cut overheads or other costs.

These are the ‘levers of profit’, the aspects ofyour business that you can change togenerate more profit.

Generally speaking, if you pull one of theselevers it will have a modest effect on yourbottom line. You can often generate a muchbigger impact, with much less disruption tothe business, by changing your pricing policy.If you can implement a successful pricingchange you will improve your volumes andmargins simultaneously, with little disruptionand at little or no cost. Do it successfully andyou will enjoy the benefits immediately,without generating a negative response fromstaff or clients. Pricing is the most powerfullever of profit.

In previous Pricing Reviews we have looked

at the steps that asset finance companieshave taken to develop their businesses and inparticular how they have improved (or mightimprove) their pricing. In this article we willmove beyond that and set out an action planfor asset finance companies that want toimprove their pricing. The steps to follow are:diagnosis; decision; preparation; get buy-in;trial; implement and monitor.

1. Diagnosis

First, have a look at the way business ispriced at the moment. How are pricescalculated? Is it done centrally or byindividual salespeople? What insights aregained from the market to help guide pricing?Have a look at the range of prices quoted forthe same type of business to the same typeof customer; are they similar? If there is awide variation you have prima facie evidencethat something is going wrong.

Which customers get the lowest prices andwhy? What costs are incurred as a result ofdiscounting or other giveaways, e.g. givingaway costly contractual points during thenegotiation? Do the most valuable clients getthe biggest discounts? When pressed by a

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Make clients pay for concessions

There is a tendency in all markets to throw in added extras for free. If a client requests concessions that are likely to cost you money, then build that cost into the price of the deal. Quote for the core product and keep extras separate. Add extras only if the client pays. Give away nothing. But if customers can deliver efficiencies that save you money, then reward them for that.

Monitor the market

Track competitors’ prices continuously, consistently and accurately. Discourage ‘war stories’, such as the tendency for the narrative about a competitor greatly reducing the price on a particular deal six months ago to be exaggerated into “They’ve been incredibly cheap for ages, impossible to beat”.

Organise pricing

Make pricing a function in its own right and task it to develop an overall pricing framework. What volume and margin is pricing expected to deliver?

Transparency

Make your pricing transparent. This tells customers they are getting equitable and defensible prices (and will help you justify your pricing if you operate in a regulated part of the market).

Improvement project

Carry out a review of the way you currently set prices, then design improvements. Come up with several possible solutions and calculate the likely outcome of each solution (qualitative and quantitative). Choose the best solution; determine implementation costs (training, system changes, and so on); prepare the organization for the changes (data, systems); get buy-in from all concerned; pilot your ideas; measure the success (how did gross profit improve over what might otherwise have been expected

for each product, customer, distribution channel and category?).

Satisfy yourself that the methodology works, then roll it out to more parts of the business.

Price waterfalls

Use Price Waterfall Analysis (see Asset Finance Pricing Review January 2013).

Test first

Always work out the likely effect of a price change before introducing it. Assess the impact of different prices on a range of customers/product groups, etc.

Sales price management

Consider abolishing the common practice of asking salespeople to ‘manage’ their portfolio to deliver a certain volume and margin every quarter or year. This practice can drive sub-optimal behaviours, including slashing prices more than necessary to make up a volume shortfall at the end of the year, or ramping up prices too much when the salesperson is ahead on volume but low on average margin.

There is no scientific correlation between the ideal price for a particular deal for a particular client on a particular day and how well the salesperson is performing against their target!

Know when to stand your ground

Train staff in negotiation, understand the value you deliver to the client, monitor actual prices achieved. Defend prices when your analysis has shown your price is reasonable in the market. Don’t give in. Surveys show that standing your ground can succeed.

Strategic pricing

Try to segment your clients into logical groups and adopt different pricing approaches for each of these.

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The pricing action plan for profitChanging your pricing policy may well be your most powerful lever forprofit. Make your action plan now!

So you want to improve your pre-taxprofits?

Well, you might decide to introduce a new ITsystem that would allow you to do morethings, introduce more products and be moreeffective than before - at a cost, of course. Oryou might introduce a new quality-management system or increase yoursalesforce or cut overheads or other costs.

These are the ‘levers of profit’, the aspects ofyour business that you can change togenerate more profit.

Generally speaking, if you pull one of theselevers it will have a modest effect on yourbottom line. You can often generate a muchbigger impact, with much less disruption tothe business, by changing your pricing policy.If you can implement a successful pricingchange you will improve your volumes andmargins simultaneously, with little disruptionand at little or no cost. Do it successfully andyou will enjoy the benefits immediately,without generating a negative response fromstaff or clients. Pricing is the most powerfullever of profit.

In previous Pricing Reviews we have looked

at the steps that asset finance companieshave taken to develop their businesses and inparticular how they have improved (or mightimprove) their pricing. In this article we willmove beyond that and set out an action planfor asset finance companies that want toimprove their pricing. The steps to follow are:diagnosis; decision; preparation; get buy-in;trial; implement and monitor.

1. Diagnosis

First, have a look at the way business ispriced at the moment. How are pricescalculated? Is it done centrally or byindividual salespeople? What insights aregained from the market to help guide pricing?Have a look at the range of prices quoted forthe same type of business to the same typeof customer; are they similar? If there is awide variation you have prima facie evidencethat something is going wrong.

Which customers get the lowest prices andwhy? What costs are incurred as a result ofdiscounting or other giveaways, e.g. givingaway costly contractual points during thenegotiation? Do the most valuable clients getthe biggest discounts? When pressed by a

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Average margin you obtain from these clients is

Volume of business being written with these clients is

Possible strategy

Low Low Grow or discard

High Low Build volume

High High Defend

Low High Try to boost price

Value-based pricing

Success with customers isn’t always about price. Ask customers what they really value. Salespeople may think they know what a customer values, but are often proved wrong when the customer voices their preferences directly. The best way to analyse this is to survey your customer base.

First ask the salespeople (from the most junior to the most senior directors) for their views on what customers want. Then ask the customers the same question. Compare the results. See the gaps? Focus on these to improve your product and service offering.

Professor Colin Tourick, management consultant, former MD of Citibank’s fleet leasing business, 34 year leasing industry veteran and visiting professor at theUniversity of Buckingham