Risk-based pricing

This situation is doubly problematic as it doesn’t only lead to sub-optimal profit but also to a sub-optimal portfolio structure. The lowest risk customers (who are being over-charged) can be tempted to leave for cheaper competitor offers while the higher risk customers (who are being under-charged) will gravitate towards your product; leading to a riskier portfolio on average. Risk-based pricing addresses this by lowering the rates charged to low-risk customers and raising the rates charged to high-risk customers.

The key to successful risk-based pricing is, not surprisingly, a good understanding of risk so scorecards are once again at the heart of any strategy. But now we’re not thinking in terms of a binary approve/ decline decision. Instead, we’re thinking on a near-continuous spectrum where we accept everyone at the right price (only declining when the ‘right price’ is too high to be legally, ethically, or otherwise acceptable).