Should we change the business model?

The Private Client Group at Merrill Lynch handles brokerage and lending services. In late 1998, Merrill Lynch and other full-service financial service firms were under assault. Electronic trading and the commoditisation of trading threatened Merrill Lynch's value proposition — providing advice and guidance through a financial adviser. Management decided to offer investors more choices for doing business with Merrill Lynch by developing an online investment site. The firm had to balance carefully the needs of its brokers and its clients, while planning for considerable financial risk. Doing so would require operations research expertise in data mining and strategic planning.

A cross-functional team evaluated alternative product and service structures as well as pricing, then constructed models to assess individual client behaviour. The models showed that revenue at risk to Merrill Lynch ranged from $200 million to $1 billion. The Merrill Lynch Management Science Group worked with executive management and a special pricing task force to:

• Determine the total revenue at risk if the only clients choosing the new pricing options were those who would pay less to Merrill Lynch.
• Determine a more realistic revenue impact based on a client's likelihood of adopting one of the new services.
• Assess the revenue impact for various pricing schedules, minimum fee levels, product combinations, and product features.
• Assess the impact on each financial consultant and identify those who would be potentially most affected.

All in all, they assessed more than 40 combinations of offer architectures and pricing. Most significantly, they were able to analyse new scenarios with a new set of offerings quickly enough to meet demanding self-imposed deadlines.

The resulting Integrated Choice strategy enabled Merrill Lynch to seize the marketplace initiative, changed the financial services landscape, and mitigated the revenue risk. At year-end 2000, client assets reached $83 billion in the new offer, net new assets to the firm, totalled $22 billion and incremental revenue reached $80 million. David Komansky, CEO of Merrill Lynch and Chairman of the Board, called Integrated Choice, 'The most important decision we as a firm have made since we introduced the first cash-management account in the 1970s.'