Is your pricing strategy leaving money on the table?
At a recent event hosted by Shifting Gears, a key topic illustrated by the speakers Richard Beauchamp, Charles Hett and Klaas Stijnen was the importance of pricing not just in product development, but as an essential business strategy. In this increasingly challenged industry, pricing is a key tool insurers have to make a difference to their revenue and bottom line, and according to Richard, “most companies leave significant amounts of money on the table.”
Adapting to the changes in product, operations, and sales and marketing are key to improving pricing strategy. Changes in the industry are often overlooked by many insurers when developing pricing strategy, according to Charles Hett, when it comes to pricing, “CEO’s are mostly interested in the competitive position” and often pricing strategies such as competitive pricing and markup pricing are developed around this, while ensuring that overall profitability does not drop below a set hurdle. But in order for insurers to be successful in the industry, they need to adopt integrated pricing strategies.
One of the main influencing factors is the customer, the more an insurer understands what customers value, the greater the opportunity for them to optimize pricing and increase revenue and profitability. According to Richard Beauchamp, the relationship between the insurer and the customer “needs to act as a feedback loop”, where “success feeds success.” This is primarily through understanding what the consumer values from their insurer and catering to these values.
A current and natural trend in any market that lacks growth, like life insurance, is that companies move to increasingly niche-oriented product strategies. However, as Klaas Stijnen pointed out, companies often don’t take profitability per segment into account when pricing. Instead pricing is done at a portfolio level, meaning insurers are not best leveraging cross subsidisation. Given that profit margins vary widely across segments, optimisation of cross subsidisation presents a significant opportunity.
Another practical hurdle that companies face is the speed to reprice. As Charles Hett explains, it often takes companies between 9 and 12 months to update or launch new products. This slow speed to market has a significant opportunity cost.
On top of this, recent examples show insurance companies as more distribution focussed than customer focussed, which causes greater issues. The recent troubles with Comminsure and their Trauma business in Australia are a pertinent example of what can happen when a company is looking more to their distribution channels than their customers.
Through better understanding and prioritizing the elements that have an effect on the success of their pricing strategy, insurers will be able to take advantage of the huge opportunities that come with it.
As Richard Beauchamp says, insurers need to disrupt or be disrupted, if insurers don't develop smarter pricing strategies, they will fall behind in the industry. Insurers need to start orientating their pricing and processes more around the industry, customers, products and operations.