Using Rule Developing Experimentation (RDE) to Determine Consumer Preferences for Residential Mortgages: A Moskowitz Case Study
- Capturing the Consumer
- Crafting the Mortgage Enticement Through Experimental Design
- Beneath the Hood
- Step 1: Gathering the Raw Material Before the Test
- Step 2: Executing the RDE Study
- Step 3: Setting Up the Data for Analysis
- Step 4: Analyzing the Results (The Real Dynamics of Rates and Messages)
- Step 5: Applying the Findings (Who Really "Wins" When Banks Compete?)
Capturing the Consumer
Consider the almost unbearable avalanche of mortgage offers in the marketplace. How often do you see mortgages trumpeted in television and web advertising? Look in your email inbox, and you’ll likely find that you’re pre-qualified for a low-rate mortgage in an environment of (perceived) rapidly increasing mortgage rates. What makes us see one offer as better, more attractive, more reasonable than another? Certainly, with big-ticket items such as mortgages, customers focus on what’s best for them in terms of interest rate, closing costs, processing fees, terms, and the like.
But how much advantage do we gain with a 6% 30-year fixed-term mortgage versus the same mortgage at 6.25%? For the homeowner, a sacrifice of one-quarter point could mean hundreds of dollars in additional monthly carrying costs. For the bank, however, offering that lower rate could cost tens of thousands of dollars in lost interest income. The bank wants the customer, but not necessarily at the lower rate.
Self-destructive, price-based competition among businesses is pervasive. We see it in mortgages, but it’s even more apparent in credit cards. For example, as the U.S. credit card market became saturated in recent years, bankcard issuers found that a productive way to steal business from each other was to lower the annual percentage rate (APR) on the cards. Once the banks neared the "acceptable" profitability floor, they introduced the concept of introductory pricing—a very low APR for a period of 1–3 months, which then rose to a much higher level, with the hope that cardholders would continue to revolve their balances for a long period of time at the higher rate. Within a couple of years, those introductory rates fell from 12% to 0%. While this was happening, the length of the introductory period sometimes increased from 30 days to 12 months.
Eventually, consumers learned the balance transfer game, moving balances from one credit card at 0% APR to another credit card at 0% APR once the introductory period on the first card had concluded. Before long, some of the credit card banks were earning more revenue from miscellaneous fees such as delinquency, overlimit, cross-selling, and the like than from more usual factors such as interest income. To knowledgeable professionals in the card industry, this shift presaged the deterioration of the portfolio’s credit quality.
Let’s look at our mortgage problem creatively. There must be other communications that banks can use to entice customers while maintaining adequate interest margins. We know intuitively that high mortgage rates are less appealing than lower rates. Can the bank influence purchasing behavior—or at least sway brand preference—through appropriate consumer messaging?
It’s certainly reasonable to expect some degree of influence, because many companies have used emotion rather than practical issues to sway preference. For example, consider MasterCard’s "priceless" campaign, McDonald’s "I’m lovin’ it" campaign, and Volvo’s "ReVOLVOlution" campaign, just to name a few. On the flip side, look at the Ditech ads, which encourage consumers to see the mortgage process as complex, cumbersome, stressful, and overly complicated. As a result, the onus has fallen on mortgage lenders to streamline the process as much as possible, in order to differentiate themselves from the commodity pool of other suppliers in the market.
How much should a bank invest in developing its message? How can it get that message across to consumers? How do we calculate the effectiveness of such messaging? We’re going to make the mortgage selection decision a little more complicated (more real-world) by attaching various sales messages, some of which might tug at the heartstrings, around the bank’s offering.