3 Benefits of a Proactive and Agile Pricing Engine for Auto Finance
Sean Johnson
March 29, 2023
- Pricing
- IT
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“We need to increase rates 50 basis points in all cells in order to meet our spread target for the next release.”
During my time as a Product Line Manager for Auto Lending at a National Bank, this became a common request. Yet it was more challenging than you might think. Not only could we not deploy auto loan rates without IT’s help, but we let the cost of funds and product type dictate the rates we would offer.
This initial question usually led to two more. “How do we know that 50 basis points (bps) is the right amount? What will this do to my pull through and overall volume?” Inevitably the answer to both was “wait and see.” “Be prepared to be reactive. We will see in next month’s auto loan volume numbers how this change impacts the overall product.”
This approach always left me frustrated and perplexed. While it is important to keep your spread target and cost of funds in mind when pricing and deploying auto loan rates, I always felt it was just as important (if not more) to understand how customers and the overall market would react to pricing adjustments.
Like clockwork, every time we deployed a blind increase across cells, we would see a significant drop in loan volumes and pull through. This scenario makes sense since it is simple supply and demand:
Low Rate = Low Spread = Higher Pull Through/Volume
High Rate = High Spread = Lower Pull Through/Volume
The lower the rate, the lower the spread; the higher the pull through/volume. Conversely, the same was true: the higher the rate, the higher the spread, but the lower the pull through. It always left me wondering where the proverbial sweet spot was. In other words, could we do more to maintain a healthy spread, offer market-competitive rates for auto loans, and truly have insight into each individual cell that I was pricing?
I realized at this moment that the ability to quickly adjust rates is very beneficial, yet without the insight needed to proactively and optimally price auto loans, I would never be able to find the perfect price sweet spot. There had to be a better way.
A Closer Look at Proactive Pricing
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What does it mean to have a proactive, optimal pricing strategy? The first, and most simple answer, is the ability to understand how the market will react to changes in price – how this will affect auto loan volumes – and then identify the ideal price across all cells. In order to be proactive, it is imperative that you are able to accurately model and forecast how various changes in rates will impact a customer’s probability of closing a loan.
To put it another way, how can auto lenders maintain volume without pricing too low to threaten their overall profitability and even increase the risk of loan delinquencies?
The answer lies in agile pricing, a better way for auto lenders to price loans and other product offers and manage overall risk. Today, technology enables auto lenders to become faster, more agile, and more successful in their pricing strategies and other touchpoints with customers and prospects.
Powerful pricing solutions now use next-generation technologies such as advanced data analytics, ML and AI, and autonomous monitoring to enable auto dealers and lenders to manage all aspects of their lending program. Pricing teams can now access and model large volumes of data, run detailed “what-if” scenarios, and use machine learning and AI-driven insights to create and deploy better prices and rate offers.
More agile pricing helps auto lenders improve their ability to deploy rate offers into the market proactively (faster) and with the understanding of how these adjustments will impact volume, spread, and pull through. This also eliminates the need for past “guess-and-check” approaches, which will be replaced by forecasts and actuals – clearly a better method.
How can Earnix help you develop a proactive pricing strategy that allows you to deploy rates in a more agile fashion?
Agility
When Earnix’s pricing software is integrated into your company’s LOS, you gain the ability to deploy rates as often as you like, without using IT resources. For me in my prior role, this would have meant being able to deploy rates daily as opposed to having to wait for the next monthly IT release.
Granularity
Earnix’s pricing software enables a lender to increase granularity and expand the total number of pricing cells. Gone are the days of using a 12x12 pricing grid composed of credit score and model year. Earnix enables lenders to segment pricing criteria infinitely and can price by LTV, mileage, previous loan history, dealer group, past bankruptcies, make, model, and other variables.
With powerful automation and machine learning capabilities, Earnix can also easily manage complex pricing segments and accompanying grids to promote efficiency and reduce manual operational errors. Employees don’t have to update every cell in the rate sheet anymore. Instead, Earnix offers the ability to automatically update and deploy rates to the market. Hence also reducing manual errors and miscalculations.
Simulation
Finally, Earnix enables lenders to import internal and external data to create a demand model to simulate and test different pricing strategies prior to deployment to help you proactively determine the sweet spot for every cell in your portfolio.
By importing your demand model or building one in Earnix , you can accurately predict a customer’s probability of closing a loan at a given price point.
Example of proactive, more effective pricing
The following table shows what many of our clients would consider to be their pricing sweet spot. It shows that Customer A has an 80% chance of closing the loan at an APR of 5.75%. If we were to increase the rate by 10 basis points, the customer probability of closing the loan drops by 15%. This is only possible by having more insight: we see that reducing the offer by 10 more points only increases the probability of closing by just 2%.
This is what Earnix allows you to do (at an even more granular level): to proactively model, analyze, and simulate across all pricing cells to make sure you are offering the best price in all cells. Say goodbye to reactive pricing and hello to a faster, better way to deploy the best rates possible.
Please note that all customers are different and have different goals when it comes to pricing. The good news is that Earnix is not a one-size-fits-all solution. It enables you to gain true insight and analysis into your portfolio and craft the best pricing strategy to meet your specific objectives. Whether you’re looking to optimize spread or volume, reduce risk, or achieve another goal, Earnix can help.
In conclusion, Earnix partners with lenders because we are invested in their success. Lenders who are able to move away from ineffective, reactive pricing approaches and who can embrace new technologies for faster, more agile pricing stand to gain a significant advantage over those who can’t. We want to see our clients become more proactive in their pricing and internally price their portfolio to meet their needs and demands.
In the upcoming year, auto lenders will find it essential to prioritize both speed and accuracy. Success, both in the short and long term, will depend on their ability to utilize sophisticated pricing data, analytics, and competitive intelligence to provide borrowers and dealers with the simplest delivery structure and the most favorable rates and offers. With access to Earnix’s cutting-edge technology and competitive insights, lenders can balance profitability and risk while presenting their best possible offer to borrowers.
Feel free to reach out to me if you are interested in learning more.