The psychology of pricing, Part 2

This post is written by Debbie Watkins, SBI’s Resident Advisor in Dhaka, Bangladesh.

Photo credit: Cengage Learning

We talked in the previous article about how pricing can encourage customer behavior to develop in a certain way – and that most people are able to spot a good deal (or a dummy) when they see one.

When we’re talking about mobile money, there are generally 3 price “events” – at cash-in, when one person transfers to another, and at cash-out. If you’re aiming to offer a true mobile wallet (a virtual “current account” as opposed to purely a money transfer service), I would argue for making person-to-person fees a very, very low, flat fee (something in the order of one US cent or its equivalent). Here’s a small scenario that explains this:

Nazmal is a security guard in Dhaka. He sends money home to his parents every month – a lump sum when he gets his salary. His parents spend the money on rent (a monthly payment); food (daily); school fees for their youngest child (weekly) and try to save a small amount in case of emergencies.

Nazmal deposits the amount he’s sending into his mobile wallet, and transfers it to his parents’ mobile wallet. They have a choice now of what to do with it, which will be driven by how the pricing you have established works best for them:

  1. They can withdraw the whole amount and keep it under the bed. They are more likely to do this if cash-out fees are structured on a flat or slab basis, as it works out cheaper for them to withdraw one larger amount than a number of smaller amounts.
  2. They can withdraw some now and some later, when they need it – this would be more expensive for them than option 1 with flat or slab pricing. If you have percentage pricing there’s no difference for them either way, except for the additional costs/time involved in visiting the cash-out agent more often.
  3. They can pay their expenses directly to the landlord/grocery store/school using the person-to-person feature on an ad-hoc basis, “save” the rest, and only withdraw cash when it’s necessary.

The third scenario has huge benefits for everyone. For the ADC provider, the cash float stays in their system, as it’s just been transferred from one user to another instead of being exchanged for cash. For Nazmal’s parents, they can pay institutions immediately without having to physically go to them; can pay small amounts for groceries on an ad-hoc basis; and know that whatever they have left over is stored securely but can still be easily accessed in case it’s necessary. For the landlord/school/grocery store, they don’t need to worry about safekeeping for cash receipts.

Of course, in order for this model to work, a number of things need to happen. Firstly, all levels of the chain need to open a mobile wallet – therefore the process needs to be fairly straightforward, free-of-charge and available in convenient locations. This is a numbers game – the more ways and places there are for people to use their wallet, the more they will use it instead of cash. Secondly, the ecosystem needs to allow for the larger institutions – the schools, or the wholesaler that the grocery store buys from – to maintain larger wallet balances (subject to tighter KYC controls) and be able to offload their mobile wallet balance into a bank account.  Finally, integration with other platforms (such as commitment savings or microloans) enables the mobile wallet to be a really useful financial tool – more on this soon.

If you are a mobile money provider, do you know whether the float is more lucrative to you than cash-out fees? Can halving a particular fee increase your transaction volume tenfold (and do you want it to?). What type of fixed and variable costs are you going to have, and how long do you expect it to take for you to recover them? In my next posting, I’ll be talking about financial modelling and looking at how variable use case scenarios can affect a mobile money venture’s bottom line in different ways.

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One thought on “The psychology of pricing, Part 2

  1. The first premise that the security guard in Dhaka would put his month’s salary on a mobile… Is there any proof or any study done on how many people would do that? I’m sure I would not do that…

    If you really want Mobile banking to succeed in rural areas, you should think of first getting people to move from the “feel” of currency notes, cheques etc towards electronic payments and create a comfort factor to trust electronic payments… The major chunk of mobile banking users currently is only the technically inclined and that too for very low denomination transactions something like mobile recharge or at times maybe a bill payment…

    I think the major lesson I took away from my limited experience in the mobile banking space was that such kind of transactions will only gain traction, if you don’t charge the customer anything… It should be a free service. But you earn on the interest on the float that lies with the bank. You earn by charging merchants – a much lower fee than interchange, international remittance could be charged, getting a bus pass or rail pass on the mobile could be charged for convenience. In short, you earn your income by charging for those services which people cannot get elsewhere…

    The main idea should be focussing on use cases that people have no alternatives…

    All the use cases in Mobile banking as of now are available free on the internet banking, or a customer can just walk up to a ATM and withdraw cash – free of cost… He might have to stand in the queue to get a bus pass or a rail pass, but nowadays that also is available on the net – free of cost (or maybe in some cases a convenience fee)

    As far as financial inclusion is concerned, mobile wallets could be a great way to reach out to the bottom of the pyramid provided someone manages to create a trust factor to electronic cash – because it is money after all and it is hard earned… For the poor, first of all income is on the lesser side, secondly one is expecting him to convert his cash into electronic money which he cant see and if you charge the poor person why would he ever choose to move to mobile banking?

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