Risk-based pricing

The practice of establishing the appropriate product pricing, for each risk profile, to offset unprofitable usage and encourage profitable usage. The revenue streams, with which this is achieved, include interest and other ancillary or administrative fees raised. The objective is to increase the interest rate and/or administrative fees for the high risk customers so as to offset the collection costs. The balance between risk (write-off losses and collection costs) and reward (interest generated) will take time to establish and requires constant management. There is a point at which high-risk customers will not pay and the interest raised will not recouped.