Lending Club Blog

Optimized Pricing

At first glance, offering different prices to people for the same product or service sounds like discrimination. In the business world, it goes by the name Optimized Pricing and happens all the time.

From borrowing money and purchasing insurance to booking a trip, Optimized Pricing is a growing trend. This practice basically consists of offering the price that a company believes a consumer is willing to pay. That’s why an airline ticket is likely to cost much more near Christmas; enough people are simply willing to pay higher prices to travel at that time of year.

While optimized pricing has been around in the travel industry for a long time, much of its growth is in the financial services industry. Perhaps that is being driven by the sub-prime mortgage crisis. Regardless of the reason, mortgages and home equity lines of credit are now commonly being priced in this way.

One way to combat Optimized Pricing is to comparison shop for items that are often priced this way. Rather than simply going with the first company you find or renewing existing services, check with other companies first. Finding a better deal doesn’t mean that you can’t use the first company. You can also use the other offers as leverage to negotiate lower costs from all providers. I played this back-and-forth game when shopping for a mortgage with great success.

Like so many aspects of personal finance, awareness of an issue like Optimized Pricing reduces much of its danger. Until every company uses this method, being aware of what a product or service should cost and shopping until you find that price can help you avoid overpaying due to Optimized Pricing.

Tuesday, May 27th, 2008 at 9:05 am

Comments (3)

  1. J:

    Mike, functionally isn’t optimized pricing really the way things
    have always been done to an extent in the financial services
    industry? The pricing structure comes from a combination of the
    value of the underlying asset or lack thereof, a risk based
    assessment of the borrower to determine repayment probability, and
    looking at what the market will bear. Different companies are going
    to evaluate different individuals differently based upon any
    individual company’s tolerance for risk, thus resulting in
    different pricing for the borrower.

    May 27th, 2008 at 9:46 am

  2. Mike:

    @J: To a large extent, what you’ve said is correct. Optimized
    pricing goes further than a traditional risk based assessment
    though. Instead of offering the lowest price the company is able to
    provide, given the risk of the customer, under optimized pricing
    they would offer the highest price they believe the customer is
    willing to pay. Without comparing options, the customer may assume
    that the offer is based strictly on risk, and likely the rate they
    would get elsewhere. Obviously this would end up costing the
    customer more.

    May 28th, 2008 at 12:28 pm

  3. J:

    Isn’t that more a mistake of the customer than the lender though?
    Also, are people really not shopping their mortgages these days?
    After all the economy has been through with the mortgage meltdown?
    I’m not talking about the need to have payday loan, but about the
    personal loans, the helocs, the first and second lien loans- are
    people really just taking these at face value that the lender is
    giving them the best price they are going to get? Maybe it’s just
    something that’s totally different about me, but I don’t even buy
    gas without looking at what the gas station next door charges per
    gallon- why would I do anything different with hundreds of
    thousands of dollars?

    May 29th, 2008 at 12:15 pm


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