Royal Bank of Canada Retail Marketing - Assignment Example

Part 1 1. The most important objective of any bank – or just about any other business, for that matter – is to increase its share-holders’ wealth by obtaining the maximum value from its earnings, or to put it another way, to have the highest possible percentage of its revenue be profit. Royal Bank of Canada presumably also wants to make its share-holders wealthier, and so it aims to achieve this overall objective with three specific financial objectives: Increase its revenue by increasing sales. Maximise its profit. Maximise its return on investment. Increasing sales, which automatically increases revenue, is the easiest of the three objectives to understand in terms of a pricing strategy. The more customers the bank can attract to use its services – opening and using savings and checking accounts, taking loans, purchasing investment instruments, even simple things like buying traveller’s cheques or a money order – for which the bank charges a variety of fees, the more revenue the bank will earn. An effective pricing strategy for these services – not necessarily the lowest price, but the one that will give customers the most perceived value – will help to achieve the objective of increasing sales. Maximising profit through a pricing strategy is another way of describing the management of costs. Every service the bank provides costs the bank something, so obviously the bank needs to charge a price for those services. The pricing strategy works in two ways, and the fee charged for accessing an ATM machine is a good example to illustrate this. On its website, RBC lists the per-use fee for ATM transactions at machines not owned by RBC as $1.50. The fee is assessed because RBC itself has to pay the ATM network (which is shared by many banks) some amount to process each transaction. Thus, that is the first and most straightforward use of the pricing strategy. The second use of the pricing strategy is as an encouragement to RBC’s customers to use the bank’s own ATM machines, for which the bank will not charge its customers a transaction fee. Even though the handling of those transactions still costs the bank something, the cost is much lower because the activity does not involve a third party. So by sacrificing one means of offsetting costs by not charging fees at its own ATMs, RBC can lower costs a different way by reducing (hopefully) the number of RBC customer transactions at other machines. Offsetting costs is also a function of maximising return on investment. The investments RBC makes come from the pool of assets created by the deposits of its customers in various accounts. Although the bank engages in a variety of investment activities, the majority of its investments are in the form of loans, for which the bank earns a percentage. Again, the pricing strategy works in two different ways. First is the ‘price’ represented by the percentage rate the bank charges for a loan. This percentage must represent a realistic amount to meet the costs of managing the loan account while still presenting value to the borrower. Second are the assorted fees which usually accompany the processing of most loans. These fees are a direct offset of costs, which helps to lower the amount of the revenue the bank earns from interest payments that has to be diverted to costs, thus resulting in a higher return on its investments. 2. For the objective of increasing sales, RBC employs a strategy of competition price and price points. The reasons for this are to maintain a competitive market position and to establish levels of value for the customer. Prices which are too far from those of RBC’s competitors would drive customers away; if they are too high, customers will seek a lower price elsewhere, and if they are too low, the value of RBC’s services might be perceived as not being as high as its competitors. RBC’s price points strategy is done in reverse; in other words, the higher-value accounts carry fees that are priced slightly-lower. The sense of value to the customer is, “If I put more money into this bank in one of these higher-level accounts, I will be charged less for services and receive better treatment.” This strategy is very effective in meeting RBC’s objective to increase revenue, because it increases the amount of customer deposits; even though the customer perceives he is getting more for less, in reality more of his money is actually in the bank’s hands than it would be with an account the customer perceives to be less valuable. Pricing strategies for services as they relate to the objectives of maximising profits and return on investment are less easy to specifically match to each of those objectives, because the two objectives share a common goal of minimising the costs of doing business. There seem to be four strategies employed by RBC that relate to these two objectives together: Competition pricing: As noted above, RBC’s fees must be comparable to those of its competitors. Leader pricing: On the other hand, there is a narrow range within which RBC can balance its prices to meet its cost offset requirements and present a more attractive price for customers. Scotiabank, for example, charges a much higher rate for non-Scotiabank ATM withdrawals than does RBC ($5.00 versus $1.50), but does not charge fees for as many services as does RBC. Overall, the costs for a similar account at the two banks are probably about the same, but for customers who rely heavily on ATM services, the difference in those specific fees is significant. RBC thus employs leader pricing in a limited way, reducing profits in some areas to realise gains in others. Flexible pricing: Accounts that cost more for the bank to maintain are charged higher fees. The actual costs of managing a small deposit account and a large one are about the same in terms of real resources expended, but the small account costs proportionally more because its profitability is less. Variable pricing: Fees are subject to frequent changes, either to reflect or encourage demand – such as by reducing or eliminating fees for a fixed period to attract new customers, again shifting cost offsets to other revenue streams – or to reflect actual increases in costs. Just as with the pricing strategies employed for increasing revenues overall, these strategies are very effective in helping RBC manage its costs, thus increasing its profits and return on its investments. 3. RBC’s pricing strategy creates value for customers in a number of ways. First, it creates the perception that the customer will profit from opening an account at RBC, that the return on his deposits will be greater than the cost of doing business with the bank. The reality may be different, but it is the perception that is important. Second, the pricing strategy creates value in presenting customers with different options, and presenting those options in a way that tells customers that depositing more money with RBC is more valuable. And finally, the pricing strategy creates value by demonstrating RBC’s competitiveness; because most fees are similar to other banks’, customer focus is drawn away from the fees to the bank’s other attributes. This also lends more impact to the occasional reduction in fees as well, even though they might only represent a shift in cost to the customer rather than an actual reduction; the value has already been established on the basis of the bank’s other strengths, so a lower fee is perceived as a much greater benefit than it might actually be. Part 2 1. Royal Bank of Canada has fairly obvious internal and external factors to consider in making its ‘real space’ pricing decisions. First is the need to maintain physical facilities, branch offices, computer and communication systems, and a competent workforce; these are internal factors. External factors are the need to pursue marketing and advertising, and the conditions of the banking market. 2. Pricing decisions for RBC’s Internet business are not significantly different from its ‘real space’ decisions, because the same factors still apply. However, there are added effects from the Internet that would change the way RBC manages its pricing decisions; information for consumers is available faster from more sources, and so there must be a strong focus on clarity and up-to-date information. Also, pricing for business that is strictly done on the Internet – for example, online-only accounts – is based on a slightly different cost structure because the necessity for physical facilities is much less. 3. Because RBC is a bank and is guided by strict guidelines as to the pricing of services, pricing is no different for the same products in the physical or digital worlds. The only exception is for services that are available only through the Internet, which have no ‘real space’ counterpart. The issues of shipping and taxes have no bearing on the costs to the consumer, since the products are services and not goods. 4. Among banks, the influence of the Internet probably does increase price competition to some degree. The Internet allows banks added flexibility in their products, such as the online-only accounts and additional functionalities for customers through the Internet. Customers also have more information at their disposal because of the Internet, and can make comparisons between competing banks very quickly. In addition, the Internet also removes geographical barriers, meaning that the local bank must worry not only about its hometown competition on the other side of the street, but also its competitors on the other side of the country, or on the other side of the world. Royal Bank of Canada: http://www.rbcroyalbank.com/personal.html Scotiabank (Bank of Nova Scotia): http://scotiabank.com/cda/index/0,,LIDen_SID19,00.html Read More

 

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