The neglected frontier: Product pricing risk

To date, little attention has been given to the measurement of product-pricing risk in evaluating the franchise value and/or risk of a financial institution. A key factor in the pricing of a product is the question of whether it is a commodity or is in some way differentiated. Differentiation can take many forms, one being service. Increasing competition should drive nondifferentiated pricing differences to zero. An example of price risk on the liability side of the balance sheet is deposits. An example of price risk on the asset side of the balance sheet is auto loans. The ultimate resolution of who to measure the price risk of an individual product revolves around the need to gather and analyze information about each customer's behavior and preferences. Factors influencing product price risk include market segment identifications that tie to price, and customer total revenue potential and cost to service. The overall pricing risk, in absolute terms, is the sum of all the individual products' pricing risks. Rather modest product price exposures have significant profitability impact.