The Impact of Marketing on the Financial Services Sector: An Empirical Investigation

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Amaral, Christopher
Price Discrimination , Price Optimization , Consumer Credit , Risk-Based Pricing , Financial Services , Sales Incentives , Sales Force Compensation , Sales Force Pricing Delegation , Consumer Lending , Financial Advisors , Consumer Heterogeneity , Latent Class Choice Model
We examine the role of marketing within the financial services sector by conducting three empirical examinations that involve pricing, sales force compensation, and targeting/positioning. Beginning with the first essay, we examine the profit implications of risk-based pricing, using the context of indirect lending, which involves a lender, sales agent, and customer. To account for the decisions made by each of these stakeholders, we develop a three-stage choice model that allows us to quantify the impact of various factors on each of these decisions. Using the estimates from this model, we optimize the customer rate and agent incentive for each risk segment, determining that risk-based pricing increases lender profitability by 26%. In the second essay, we examine the behaviour of external sales forces, again using the context of indirect lending. We find that commission impacts both the demand allocation and pricing decisions made by external sales forces, albeit to a larger extent for the pricing decision. Given the impact of commission on these decisions, we optimize the commission rate for each price on the focal lender’s menu of prices, finding that commission should exponentially increase with price to alleviate moral hazard concerns that arise when external sales agents select the lowest price to secure a sale. Optimizing commission in this way has a substantial impact on profitability, increasing return on adjusted capital by 1.33 percentage points. Finally, in essay three, we examine the motivational drivers behind customers’ decisions to use financial advisor services. A latent class choice model reveals two segments that differ in two important ways with respect to their motivations for seeking financial advice. First, although higher levels of trust, self-efficacy, and risk tolerance increase the probability of using financial advisor services for both segments, albeit to a larger extent for segment 1, personality only impacts segment 1. Second, we find that segment 1 is motivated by the extent of positive attitudes towards financial advisors (i.e. promotion focus) while segment two focuses on negative attitudes (i.e. prevention focus). Collectively, these essays increase our understanding of the role of marketing within the financial services sector, answering research questions that have gone unanswered by academics and providing practitioners with tools to improve marketing effectiveness.
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