Value-based pricing drives product innovation while also saving many lenders a bundle in fees. So why has the auto lending sector been so slow to adopt value-based pricing?
Once upon a time, buying software was like ordering food at the Monty Python restaurant. You could have Spam, Spam or Spam. It’s the hipster version of the famous Henry Ford quote: “A customer can have a car painted any color he wants, as long as it’s black.”
The emergence of Software as a service (SaaS) platforms heralded innovation in product design, service delivery, customer experience, and fee structures. Cloud-based applications signaled the next great leap forward in delivering on the promise of digital. Finally, we could purchase software that solved our specific business problem and pay for it in a way that made sense for our business.
SaaS lending platforms have certainly brought about innovation in product feature sets and service delivery, but while 95% of the business-to-business (B2B) world has moved to value-based pricing, auto lending has remained stubbornly in the past.
The terms “value-based,” “performance-based,” and “success-based pricing” are used for variations on the same basic idea. You pay only for the value you extract from a good or a service. You don’t pay for all the rest. Value-based pricing is becoming accepted as a best practice in B2B markets, and most of the world does business that way today. For an auto lending platform, value-based pricing would mean a lender only pays a fee when they succeed in closing a transaction.
The auto lending sector has been slow to adopt this model. Most of the sector is still using conventional cost-based and competition-based pricing, a system that is out-of-date and less efficient. It means that most lenders are still paying for loan applications and not funded deals. That is more than a pricing problem; not only does value-based pricing save lenders a bundle in fees, but it’s also a proven engine of innovation that benefits everyone in the value chain: vendors, lenders, dealers and, ultimately, borrowers.
Value-based pricing has a wonderful effect of focusing the mind on customer success. It has been shown to inspire design thinking that leads to improved customer experience, a more focused product-market fit and lower costs. In my company, we call it “per funded deal pricing” because lenders pay only when they have benefitted from the value of the platform by funding a deal.
This win-win mindset is integral to our design principles. Everything we do in our system, every change we make, is designed to help lenders fund more deals because that’s how we grow and how we succeed together. In fact, because we succeed only when our clients fund a deal, our relationship is more like that of a partner, not just a vendor.
Ultimately, value-based pricing forces vendors to put customer success first. It’s a catalyst that spurs innovation and incentivizes vendors to make product improvement a continual process. Moving to value-based pricing would benefit vendors, lenders, dealers and, ultimately, consumers.
Vlad Kovacevic is the founder and CTO of Inovatec Systems. With a focus on efficiency, flexibility and connection, JAVELIN by Inovatec is a state-of-the-art lending platform.
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