Sundar Ramanathan is a Banking Product and Pricing Executive with experience in exceeding/meeting growth, capital, liquidity, and profitability objectives through product and pricing levers.
In this episode, Sundar emphasizes the importance of moving beyond product commoditization, instead, focusing on creating value through customer experiences, and pricing as the outcome of value creation.
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Why you have to check out today’s podcast:
- Discover the fascinating concept of the indifference curve in the context of pricing banking products
- Learn the art of developing a customer-centric approach to pricing banking products, taking into account essential factors for success
- Find out how you can implement value pricing strategies, even with commoditized banking products
“On the retail banking side, we hear commoditization a lot. But I think there is an opportunity to go beyond that. I think products disappear and experiences emerge, and experience is what creates value. And value can be priced.”
– Sundar Ramanathan
Topics Covered:
01:36 – How he found himself in pricing
02:47 – Talking about examples of banking products
04:39 – Is bank’s pricing based on value or cost
09:15 – The importance of balancing cost and value and highlighting the indifference curve in pricing
11:55 – Determining the area of indifference in banking pricing
16:06 – How to let borrowers decide in your favor over your competitors
19:37 – Where you create value pricing in banking products
22:06 – Sundar’s best pricing advice
Key Takeaways:
“The product structure and pricing might be commoditized, but where you create the value and enhance your pricing margin is the experience.” – Sundar Ramanathan
“You will never know the right pricing unless you are bold enough to make those decisions to test that elasticity and have a plan B.” – Sundar Ramanathan
“You can only create value by removing the friction as much as possible compared to competition.” – Sundar Ramanathan
“You can never win by pricing.” – Sundar Ramanathan
Connect with Sundar Ramanathan:
- LinkedIn: https://www.linkedin.com/in/sundar
Connect with Mark Stiving:
- LinkedIn: https://www.linkedin.com/in/stiving/
- Email: [email protected]
Full Interview Transcript
(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Sundar Ramanathan
On the retail banking side, we hear commoditization a lot. But I think there is an opportunity to go beyond that. I think products disappear and experiences emerge, and experience is what creates value. And value can be priced.
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Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the customer’s relationship between them. I’m Mark Stiving, and our guest today is Sundar Ramanathan. And here are three things you want to know about Sundar before we start. He leads the product and pricing function of Canada’s fifth largest credit union. He’s been in financial services for 24 years, and he’s recently got into watching stage plays. Welcome, Sundar.
Sundar Ramanathan
Thank you, Mark.
Mark Stiving
Hey, hard question. How’d you get into pricing?
Sundar Ramanathan
Interesting. It was about 15 years ago, and I started my career in the sales and business development, and then I realized, I really like to do something where I can see immediate value and long-term value. And the pricing is one thing. When you make those decisions, it impacts real time, not only the people, customers, but also the balance sheet and your organization in a big way. So that was very exciting. So you are always in the moment, and that’s what pushed me into pricing. Then I realized pricing is a lot more than that.
Mark Stiving
Yeah. What’s often funny is I think of pricing as the fastest of all of the marketing mix variables you have. And almost any decision you have, it’s the fastest impact.
Sundar Ramanathan
Yeah.
Mark Stiving
And so, it impacts an individual sale, it impacts the balance sheet. It’s awesome. Right? Absolutely fantastic.
Sundar Ramanathan
Yeah.
Mark Stiving
I don’t know much about pricing banking products and so that’s why it’s going to be fun to have you on because I get to learn a lot here. First off, what is a banking product? Give us two or three examples of different banking products that we might be talking about. How do we price it?
Sundar Ramanathan
Yeah, so just to add some context to banking, it’s Canadian banking products, right? So that’s where my expertise and focus is. take the most simple example. I think the core concept of banking is you borrow money and you lend money, and what you pay for borrowing the money from your customers, and then what you get for lending it out, the difference is your spread is as simple as that, right? If you take the most basic account, your checking account, your savings, demand accounts, your term deposits, or the fixed date deposits depends on which country you are in. Those things would be the example on the liability side, what you raise as funds from your customers. On the lending side, the mortgage is your biggest, right? Any country for that matter, mortgage has always been one of the largest products that is out there from the banking point of view. And most of the time it is the largest decision a customer makes as well.
Mark Stiving
Okay. So that makes sense. If we just talk about the deposits, whether it’s savings account, checking account, we talk about mortgages as two different products. One of the things that strikes me is you started out by saying, this is the spread, right? And I get the spread.I mean, I understand the concept completely, and if I were selling a product, I would call that margin, right? Here’s the margin that we get.
Sundar Ramanathan
100%. That’s right.
Mark Stiving
Cost versus the price. Since I know that you read a lot of what I write, I hate cost-plus pricing. And so I’m going to guess that you’re not doing cost-plus pricing, as in we need three points of spread. So therefore we’re moving this number to this. Is that a true statement or not a true statement?
Sundar Ramanathan
The true statement is yes, you hate it, and I’m aware of that hatred. The reality is somewhere in between, right? And the optimal solution is moving towards where your thought processes are value-based, right? What has happened today on the banking side of things is like the value-based precinct is a layer on top of the core, the foundational, right? A lot of times your cost of funds might determine the cost of pricing alone. So there is a cost angle to it, but, it’s like whether the horse comes before the cart or the cart goes before the horse, right? Or the better way of saying it is egg comes first or chicken, right? So it depends on for, let’s take the context here. Each financial institution in Canada be the banks or the credit unions. There is a purpose. There is why they exist and what kind of markets they cater to.
The larger banks have very commoditized mass market products. The credit unions play in very niche areas. Some of them are in the mass market. As long as we know what each credit union knows their purpose then the kind of member segments you are interacting with and what they value in dealing with you versus a credit union versus a bank or X credit union versus a Y credit union. So the cost plays there, like the pricing plays in both, also the value, but at the strategic level, value is very important. Then comes once you understand the business model then you talk about where you want to lend, and to lend, you need to raise the deposits. The cost of deposits do determine the cost of lending, that’s just the core.
But you move from there to say, for different members, value different products at different stages in their life, right? For someone, a mortgage interest rate might be more critical than a fee on a checking account, right? Or a rate on a savings product where the daily save for a rainy day. For some they might value investment advice, and they’re willing to pay for that more than they care about a mortgage rate. So understanding what your members, in our credit union policy, customers are members, so I might interchange it. It is very important what they value, in a pricing policy, you can talk about price elasticity, value-based pricing, or price sensitivity. You can name anything you want, but understanding, so your core, like your teachings or your interpretation on understanding the value and pricing it, that’s very critical, of course, but I also think cost is the base in the banking world. From there, we start into value-based pricing. Okay?
Mark Stiving
I’m going to tell you why you’re wrong.
Sundar Ramanathan
Looking forward to it.
Mark Stiving
So you have so much more experience at this than I do. But here’s how I would be thinking about this problem, if I would separate it into two very different chunks, right? So one chunk is the deposits, the other side is the loans. And so when I’m thinking about the deposits, my question becomes what’s the lowest interest rate I could get away with and still get people to deposit into my checking account or into my savings account, right? So I want them to come to my credit union and make their deposits there. So certainly there’s segmentation, there’s different people that care about different things, and so we’re watching who those people are, but I want to be able to win them at the lowest rate, and I’m going to make the assumption that your rates move with prime rate or some inflation rate or something somewhere.
And so if interest rates or inflation skyrockets where we just went from what, here in the US you could get 0.1% interest to now, maybe you could get 2% interest on a savings account. So when I have a choice where I want to put my money, I’m choosing between multiple different vendors, multiple different banks or credit unions. And so as I’m making that choice, what you have to be looking at is how am I different from my competitors and how am I priced relative to my competitors? Now, we haven’t even talked about loans. Let’s just stop right there and just talk about the deposits. How far off was I? And does that make sense?
Sundar Ramanathan
Yeah. So we are perfectly aligned. You are off on the interpretation that I was wrong. I think we were both articulating the same. Yeah, so it’s a question of, I think cost and value has a significant play here as far as pricing deposits there. And you said like, what is the lowest point at which I can generate a particular volume of deposits, price point, right? Assuming that I’m in the consideration list for the customer and assuming that I’m one of the preferred financial institution deal with it, then if we take in pricing in isolation from there, because we have already done the value proposition, I would say that I agree with your point on pricing at a point where, does it meet the volume requirements for the financial institution? I would consider it like an indifference curve, right? There is an area of indifference where it doesn’t matter if your pricing is higher, you’re not going to generate that additional volume you require.
Let’s take an example. Let’s take a one year fixed date deposit and your pricing at let’s say 4%, and at 4% you can generate a volume of a hundred million dollars a week and it satisfies your balance sheet needs or your appetite. Now, if you want to increase that a hundred million to, let’s say you wanted 150 million. To do that, you may have to go to 5%, right? Now, that’s where this value struggle happens. Most of the time what happens is we see the competition, we see the cost, we end up pricing at 4.25, 4.5. We could have got a hundred million with 4%, and that 4.25% or 4.5% is not going to give you that incremental volume. I think that’s where you are leaving money on the table. That’s where the price leakage happens. That’s where you’re not creating that additional economic value out of your pricing. That’s where I think we are.
Mark Stiving
It sounds like you’re describing a step function of demand versus price, as in, if I were to, in a normal market, if I were to lower price, it has no effect until I get past the dollar point and then all of a sudden there’s a step function.
Sundar Ramanathan
That’s exactly right. Yes. And I call it indifference. Don’t price it in the indifference area. That’s the biggest challenge for pricing managers today.
Mark Stiving
Yeah. And is that area of indifference in banking around the whole numbers? I’m curious if you’re in an area of indifference or not.
Sundar Ramanathan
It again depends on the segment you are targeting or the customer base that you are positioning that pricing, right? The best way to see is the price elasticity of your book, right? At which you have generated historical volumes and where the comparative competition pricing is at. That’s where the struggle is, right? You will never know the right pricing unless you are bold enough to make those decisions to test that elasticity and have a plan B. If you don’t hit the goals on a particular type of deposits, what’s your plan B in backing? Right? so a lot of the time it drives down to your balance sheet aspirations, your growth aspirations when it comes to pricing and where you have the weight.
If you are managing for profit, then you can test that elasticity. If you’re managing for growth, testing on pricing elasticity on the downside is very difficult, right? At the lower end it’s difficult. So what’s the aspiration? Are you managing for market share? A lot of financial institutions aim for market share growth, right? And if you are not so keen on market share growth or you’re not so keen on the top line numbers, the growth numbers, then if you’re managing for profit, then it becomes relatively easier for pricing to test that price elasticity. In my 15, 16 years career in pricing specifically, I still don’t know whether I have priced in indifference or not, but how close on the edges you are, that’s the best bet you can. But if you’re right in the middle of the area of indifference, you’ve just lost irrespective whether you’re managing for profit or managing for growth, you are just losing money there.
Mark Stiving
Yeah. And I’ll say to be fair to you, Sundar, absolutely nobody ever knows if they’re priced right.
Sundar Ramanathan
Thank you so much.
Mark Stiving
We just make the best decisions we possibly can. We try to get better tomorrow than we were today.
Sundar Ramanathan
Yeah.
Mark Stiving
Because we can’t read our customer’s minds. We don’t know what’s the right answer. So, we’re just always trying to get better.
Sundar Ramanathan
Exactly.
Mark Stiving
I think you said this, but I want to make sure I got it right. I was thinking the area of indifference was around a whole number, but it’s probably more likely around a whole-ish number relative to the competitor’s price. So 25 points down, 50 points down, I guess I should say higher, 25 points higher or 50 points higher. I could get people to move to my credit union, but at 10 points higher, I can’t get them to move.
Sundar Ramanathan
If we take that product in isolation, and if that product is what the member values as the core product in this financial relationship, then you are bang on, right? Then it becomes a price conversation, assuming the product is commoditized, which is the majority, and the experience is where the differentiation is. And if you are in the consideration list, you are right. Understanding what takes someone to move, irrespective of that friction currently in the system. That’s the right thing. I’ve seen many times people pricing aggressively and not achieving that volume, but they’re convinced that that is the right pricing. You are right. when you say it’s not the whole-ish number, compared to the competition compared to where the overall interstate environment is, but one or two basis points is not going to move five or 10 basis points, maybe it depends on the type of products and the value we are talking about, right?
Mark Stiving
Yeah. Okay. And so then if we had the exact same conversation on the mortgage side, right? On the borrower side, again, I actually don’t care how much it costs you to get the money I care about my customers and how much I could get away with. How much could I get them to be willing to pay in order to borrow money from me and not from somebody else?
Sundar Ramanathan
Exactly. So on the mortgage side, especially in Canadian banking, I will say that one price doesn’t fit all and all mortgages are not the same depending on the source of funds. I’m going back to cost, which you may not like. Some of the products are very highly commoditized from a product structure and pricing, right? take an example of high ratio mortgages. We call it high ratio mortgages. It is easily securitized, and it has a default insurance guaranteed by the government, the federal government. and because of that, it has huge securitization access. Like we can place it in a candidate mortgage bonds program, we can issue N-H-A-M-B-A mortgage backed securities. What happens is the funding cost is now a commodity. Like everybody has access to that funding cost. And the funding cost is very similar. The limit for you to price beyond a range there is difficult. Like, there’s a limitation unless there’s a huge significant value proposition beyond the product itself.
Mark Stiving
But I want to come back to the point that says, because your competitors have the same cost basis, they have the same benefits, they’re willing to price aggressively. And so in order for you to win that business, you have to price somewhere near where your competitors are pricing because it’s somewhat of a commodity in that respect.
Sundar Ramanathan
Yes, that product is commoditized, but that is only one part of the mortgage, right? There is another product of mortgage which is not bound by these securitization requirements. The commoditization is far less. There are guiding principles from the regulators. there is of course those checks and balances and the risk parameters we have to comply with. But however it is a little bit broader than this commoditization, there is definitely a value play by geography by asset type, like type of house. The market conditions, the demand versus supply, the number of financial institutions in those markets will determine the pricing and the convenience of the mortgage holder. Like if they perceived that it’s a lot convenient to deal with credit unions because of value alignment. Like there is a much broader relationship in the business side of things, business banking side of things or deposit side of things. There is so much flexibility and opportunity. There is a lot of play there on the value side. But when it comes to these commoditized securitized mortgages the scopes are very limited. Where do you want to play? It’s a very narrow region there.
Mark Stiving
Okay, understood. And so I want to go back to the concept of the spread, or I’ll think of it as margin, but either way is fine. And so after we’ve had this conversation, let’s pretend that I’m selling a product and my cost is the same as my competitor’s cost, and it’s a daily market. We all set one price and people choose to buy or not buy. Then I could see where the smaller the margin I’m willing to take, the higher the market share I’m able to get. And that’s really what you’re saying, as in, if I manage that spread, so the smaller the spread I’m willing to accept, the more business I can do, and if I only want a really large spread that I’m going to end up with less business. Is that a fair statement?
Sundar Ramanathan
Assuming everything else is at par with the market, right? Which is in reality, that is not the case, right? Take mortgages for example, the process speed. So the product structure and pricing might be commoditized, but where you create the value and enhance your pricing margin is the experience, right? If you’re a mortgage broker, you might expect certain standards in turnaround times, clarity in the policies. If they have a question, your turnaround time in responding to that, if you’re a mortgage customer, the same thing. So convenience does create the value, and you can price that convenience part. Even though the product is commoditized and the pricing is narrow, it depends on which end of that narrow margin, like the room you are going to be in, depends on all these experiences you create and the capabilities you create, the more friction you remove, you’re creating value and that can be priced.
Mark Stiving
I am going to say what you just said, actually, I can’t because you just said it. What you’re really creating is value, right? So when you say we’re creating an experience, what we’re really creating is value. This is what our customers want, this is what our customers value. And I could think of customers as brokers that are selling my products. I could think of customers as the end user, but either way, it’s my customers and the more value I create, the more I get paid for that
Sundar Ramanathan
100% right. Most of the time it matters in these larger or complex products. When I say complex more like a mortgage, like a heavy investment, heavy cost associated with it, you can create that. The advice creates value, right? The whole thing. The minute you go into the transactional nature of business, like, which is day in, day out and commoditized, you can only create value by removing the friction as much as possible compared to competition.
Mark Stiving
Yep. I absolutely love that. And, as always, it comes down to value differentiation. How are we doing our job better than our competitors are.
Sundar Ramanathan
A hundred percent. Yes.
Mark Stiving
So nice. Sundar, let’s wrap it up and let me ask you the final question. Okay. What is one piece of pricing advice you’d give our listeners that you think could have a big impact on their business?
Sundar Ramanathan
Especially in the banking side, on the retail banking side per se, we hear commoditization a lot. But I think there is an opportunity to go beyond that. I think products disappear and experiences emerge and experience is what creates value and value can be priced. Once we get stuck to commoditization and only that part of it, then you never win from there because somebody’s going to always undercut you.
Mark Stiving
Yeah. I often like to say, and I work a lot in the tech space where we have product managers, and I often like to say, if your product managers use the word commodity, you should fire them.
Sundar Ramanathan
Yes. And I read that in your book, and that is what I say to my product and pricing and marketing folks. Like, you can never win by pricing.
Mark Stiving
Yep. Pricing is the outcome of the value we create.
Sundar Ramanathan
Exactly.
Mark Stiving
Nice. Sundar, this has just been fun. Thank you so much for sharing your knowledge. If somebody wants to contact you, how can they do that?
Sundar Ramanathan
LinkedIn. That’s the best way.
Mark Stiving
Okay. We’ll put a link to your URL, your LinkedIn URL in the show notes. To our listeners, thank you so much for your time. If you enjoyed this, would you please leave us a rating and a review? And if you have any questions or comments about the podcast or pricing in general, feel free to email me, [email protected]. Now, go make an impact!
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