Monday, June 16, 2014

A 52% price increase this year (or 119% over 5 years) is never going to be OK



Editors Introduction: In these days of attention deficits, 140 characters tweets and short posts on Facebook and other social media platforms, its not often that those of us who set prices get detailed, comprehensive feedback from customers.

In this guest blog post from Judy Gillespie she tells us, in 7,653 characters (that would be 55 tweets!!!), why a 52% price increase in her pet insurance policy is not OK. 

An open letter to all pet insurance companies
Every business has the right to make a decent profit for the money invested by the owner and/or shareholders.  I get that and I have no problems with it – in fact I even wrote a blog post about it: I’m a money hungry business person and proud of it!  

However I was horrified when I opened my pet insurance renewal and saw a hugely inflated premium staring at me. Yep that was the first thing I saw when I opened the letter.  “That can’t be right” I thought and so I called the customer service number. 
I explained to the staff member that I was sincerely hoping the figure was a typo as surely no business could expect to get away with such a large increase? But unfortunately no – it wasn’t a typo.  It was then explained to me that the price increase was due to an increase in veterinary fees and the fact that the premiums were now being determined using breed, age and location. Apparently a similar method to that used by insurance companies to determine house insurance premiums.

Unfortunately for the poor staff member I then had a fairly spirited conversation where I tried to explain that vet fees had in fact not gone up (certainly not by 50%) and was she perhaps meaning that the range of veterinary services now available had indeed increased which could have an impact on insurance payouts?  She was really only comfortable sticking with her script and I was just getting angry that some of the reasons she was being told to give to clients were in fact wrong and vets were being blamed for the extreme price increase.  So I asked to speak with a manager, however there wasn’t one available but I was told someone would call me back.
After I hung up I realised I had missed some paperwork behind the renewal invoice and I was fascinated to see a letter that said:

Dear Judy......
We have some good news for you to share with Nina!  The details of their PetPlan Covered for Life policy are enclosed!  Woof, Woof – Hooray!
The letter then goes on to talk about some changes in the look of packages, etc. I think - to be honest I really didn’t read any more as I was too stunned by the ‘good news’ bit!   You’re kidding right?  Now you want me to be happy about a 52% price increase?

So the next day I waited for a call.  It was nearing midday when it was suggested perhaps a message on their Facebook Page was the way to go which I tried and unsurprisingly I soon received a call.  I must say the supervisor did a brilliant job and we had a very interesting conversation.

So what were the real reasons behind the 52% increase? 
It was explained to me that the pricing increase had been determined by the underwriters and directors as for the last couple of years the company has been paying out more than they have been collecting in premiums – never a good business model.

The pay outs have significantly increased over the years due to the increase in available veterinary procedures such as treatment for cancers and more complicated orthopaedic surgeries etc.

The premiums had to be significantly increased so there were sufficient funds to maintain payouts (and I suspect for the survival of the company).

Ok, I get all of these reasons – I really do. If revenue is less than expenses, any business is in trouble.

But I can’t for the life of me see that a 52% increase makes any sort of good business sense and this is why.... 

The way I look at it - in this situation there are 2 main groups of pet insurance clients:
1
  1. Those that can easily take their business elsewhere as they have younger pets with no pre-existing illness or injury, and
  2. Those with senior pets or those with pre-existing illness or injury that won’t be able to get insurance elsewhere. 

Guess who will stay and who will go?  Yep, those with younger pets (i.e. the ones that are less likely to make expensive claims) are likely to leave and find another insurer and those with older pets (i.e. the ones that are more likely to develop age related injury and illness and therefore more expensive claims) will stay – because they have no choice.

Just how many existing clients are going to put up with a 52% increase?  Isn’t it also likely that the number of clients that leave will negate any revenue increase from the premium rise?  Wouldn’t it have made more sense to perhaps work with a 20% rise over three years for existing clients and a different and higher rate for new clients?
If financially this wasn’t an option and the 52% increase really was the only way to go for the survival of the company then it still makes no business sense to do it the way it was done. Why would you send me my claims renewal with the huge increase staring me in the face when I opened the letter, and then rub my nose in it by telling me there is some good news to share with Nina?

Why wouldn’t you put together a letter from the CEO explaining the situation?

It could include something like.....

  •  Over the years we’ve paid out xx in paymentt
  • The veterinary care that is now available for our pets is so advanced it matches the care offered to humans however that comes at a cost
  • Over the years we’ve become the best at paying out 100%/lifetime care/etc.
  • However we’ve kept our premiums too low & our payouts too high for too many years and now we find ourselves in a difficult situation
  • For the sake of the company and to continue to meet our payout obligations to you the pet owner we need to introduce serious premium increases.
  • We understand that this is going to be very difficult for some but we wouldn’t be doing it if it wasn’t necessary
  • We value you as a client and we hope you appreciate what we have been able to deliver in the past and will continue to do in the future

Really... I could keep going....  And most importantly this letter full of honest information should go IN FRONT of the premium renewal.

Just tell me the truth.

I’ll respect a company that is honest enough to say “Ok, so maybe we’ve stuffed up.  We’ve tried to keep our premiums as low as possible over the years and we haven’t been increasing them enough to keep up with the amount we’re paying out for your pet’s care and so now it’s going to hurt and we’re sorry for that.”

I don’t respect a company that blames the industry that should be their closest ally. 

The pet insurance industry and the veterinary industry have a symbiotic relationship and ultimately they both want the same thing: for every pet owner to have insurance for their pet. From a veterinarian and veterinary nurse perspective it would mean they could deliver the very best of care without the lack of finances hindering treatment options.  From the pet insurance company perspective, it obviously would be a huge financial benefit and to top it off they would also love it if vets and vet nurses were able to convince pet owners to take up insurance.

So why aren’t both the veterinary and the pet insurance industries BFF’s?

For example why haven’t both industries got together and worked out some sort of deal where pet owners who actively look after their pets receive a reduced premium?  Vets could issue ‘Health Certificates’ to those pets that regularly receive wellness checks, maintain a healthy weight and are fed veterinary prescribed diets. It would be a win/win situation for both industries!

You see, apart from pet insurance, I also pay $440.00 annually for Nina to be in a Wellness Program which includes:

  • Free consultations
  • 20% discount on food
  • 10% discount on drugs and other OTC products
  • Vaccinations
  • 1 x Dental scale and polish
  • 1 x healthy pet screening (urine, bloods, etc.)
  • 2 x comprehensive physical exams
  • Amongst other services...eg weight management, etc.

Nina has only ever been fed veterinary advised food, has never been overweight and has never missed a vaccination. 

So why am I paying the same premium as a pet owner with an overweight dog who is only taken to the vet once a year for vaccination and is fed Chum?  It doesn't make sense.

And then there is the moral side to the story

I have a choice – I can take my business elsewhere.  My heart breaks for those who can’t.  Those pet owners with senior pets who have paid premiums for years and who now have to either find an extra 50% every year to maintain coverage or even more heartbreakingly have to drop the coverage for their senior pet because they can no longer afford it. 

Seth Godin says it succinctly in his blog post Shame is a brand killer: “When your public sees you choosing a path that’s shameful, that they don’t approve of, that offends their sensibilities, it creates a dissonance that might never be erased.”

And what does this mean for you as vets and vet nurses?  You’re the ones that will have to have the difficult conversations with owners if/when these previously insured senior pets do develop a medical problem that requires treatment - and the insurance is no longer there.

Not only does a 52% increase in premiums not make much business sense to me it is also morally wrong for those pet owners that have been clients for years and whose senior pets are now most in need of the insurance.  I can maybe forgive a bad business decision, but I can’t forgive a decision that is morally wrong. 


So now I'd really like to hear your opinions - maybe I've got it wrong - tell me what you think in the comments section below...


Sunday, April 13, 2014

Who’s Responsible for Pricing?



Who has responsibility for Pricing in your organisation?

Many readers will probably answer "the Marketing Department". After all, Pricing is one of the "4P's" of Marketing, albeit the 'forgotten P'. In Leading Companies, there will often be dedicated pricing resources in the Marketing team, and in other organisation's, Product Managers will probably devote about 10% of their time to this business-critical function.

In many other companies, particularly those that practice cost-plus pricing, the people who are responsible for pricing are typically found in the Finance area. After all, that's where the cost data, on which they base their pricing decisions, resides.

Believe it or not, some companies will see Pricing as a "Sales" function. This oxymoron has given rise to the view that, particularly when Sales are heavily dependent on discounts to close a deal, Sales is the "un-pricing department", while Pricing is the "sales prevention department"

The fact is that pricing is everyone responsibility! Here's why.

In the last month, I have had to call the same insurance company on two separate occasions. The first occasion was to correct the address my policy renewal notice was sent to. A system upgrade meant that my renewal notice was sent to the wrong address, and by the time the letter was correctly readdressed, the policy had expired.

In the process of updating my records, and taking out a new insurance policy, the very courteous call centre staffer gave me a 50% (~$300) discount on the policy, vis-à-vis the one that had just expired. Thank you very much!

The second time I called them a couple of weeks later, was to get a different policy changed from joint names to a single name (I have no idea how or why this change occurred: probably that system upgrade again). Once again, a different call centre staffer offered me a discount (21%, or $80) on my policy renewal.

On neither of these two calls did I enquire about the price of the policy, or ask for a discount. I was given the discounts without even asking! Small discounts to compensate for the inconvenience experienced may have been warranted, but certainly not of the magnitude of the discounts given. Money has been left on the table.

Let's answer the opening question in a bit more detail: price setting could be anyone's responsibility: Marketing, Finance or Sales. But getting those prices is the responsibility of everyone in the organisation.

There is a Law of Discounting…


Ever had a conversation like this in your house? Your partner comes home with a bag of expensive-looking shopping.

You:                 Hey, what did you buy?

Partner:           I picked up this fantastic dress / suit (insert product of your own choice here).

You:                 Looks great. How much was it? 

Partner:           It was 50% off

You:                 Great! (No major damage to the credit card balance then, you think to yourself)

There is no doubt that we now live in a discount world. In his book "Bargain Fever" Mark Ellwood finds that the average discount offered in the USA 10 years ago was around 15% - 20%. Today, that average is closer to 45% which, being an average, means there are discounts much higher than 45% included in that figure. Anecdotally, the same trend is occurring here in Australia. But one thing is for certain: many companies can no longer be guaranteed that customers will pay full price.

Although Pricing is part art, part science, the (very common) conversation above breaches what is known as the Weber-Fechner law. Adapted to Pricing (and Behavioural Economics) from psychophysics research conducted by Ernst Heinrich Weber (1795 - 1878) and later Gustavo Theodor Fechner (1801 - 1887), the law states that the difference between two physical stimuli is proportional to the magnitude of the stimuli. So by not providing one stimuli (i.e., full price), the attractiveness of the discounted price, or the magnitude of the discount, cannot be properly evaluated and assessed.

In the above conversation, because we don't know the full or list price of the dress or suit, the partner doesn't know whether the purchase is a good deal or not. The same applies to the actual purchase by the customer. After all, there is a difference between 50% off a $2,000 dress or suit, versus 50% of the price off a $200 dress or suit.

Sounds perfectly logical doesn't it? And yet, I still see many companies still ignore this simple law.

A couple of years ago, while walking down Oxford Street in London, I picked up a brochure from a basket outside a telco’s store, which simply read "£20 Off". Once again, £20 off may be a great deal, but it didn’t say what the full price was and whether it was off a call plan, a handset or something else. The brochure didn't assist in evaluating the attractiveness of the offer.

More recently, there were two enormous billboards, side by side, on Platform One. At North Melbourne station. The first billboard read "Energy Bill Confusing?" Well of course they are, as anyone who has looked at a utility bill, or contemplated switching providers, will attest to. Ask someone what price they pay for energy, whether it's gas or electricity, and they won't be able to tell you. They will be able to tell you what their average bill is though.

The next billboard read "Ours is simple. Pay on Time and get 10% off". Feeling less confused? Hardly! The Weber-Fechner law has once again been ignored. Ten percent off what? Well that depends on what plan you are on, so while 10% off may reward you for good behaviour, it doesn't remove the confusion.

So what are the key lessons or take-always from this discussion? In many industries today, and particularly in B2C markets, a discounting strategy needs to be an integral part of any pricing strategy. The "base" or full price will come from your pricing strategy, but the price the customer pays, and your revenue maximisation opportunities, will increasingly be found in your discounting strategy.

Two Simple Pricing Rules That Will Help Every SME...



Over the years, I've conducted close to 80 public or in-house pricing workshops, all over the world. The general, consensus from attendees at the end of the program, whether it ran for three hours or three days, is usually something along the lines of "Wow, I didn't realise there was so much involved in Pricing!"

It should come as no surprise therefore, that being asked to write only 350 - 500 words for Small and Medium -sized Enterprises (SME's) on "the basics of pricing" is a formidable task, but one I will attempt to do by sharing just two simple rules of Pricing.

Rule Number One: Value is Subjective
Ask one person why they have private health insurance and she might tell you "...for piece of mind". Another might tell you "...to get out of the public health system", and a third might say something like "...to get back to work or home quicker".

These responses illustrate that all value is subjective. Yes, you can talk to them about features and benefits, but ultimately, value is in the eyes of the customer. So what are the implications of this for your pricing strategy?

Firstly, value is what customers are buying. They don't care about your costs. So the best way to increase prices is to increase value (and vice versa for decreasing prices), and not try to defend your price increase on the basis of the latest CPI figures.

Secondly, because value differs, between customers, so can (and should) your pricing. While one-on-one pricing may be "marketing nirvana", at a minimum there will be groupings of customers who see similar or identical sources of value in your product. They are called "customer segments", and rather than just giving them a warm and fuzzy name, develop actionable strategies towards these segments, whether it be targeted mail-outs or segment-specific pricing.

Rule Number Two: All Pricing is Contextual
If you're feeling downhearted after reading Rule #1, and learning you're not in control of this concept of value, the good news is that Rule #2 provides a solution, or at least some good assistance. You can shape perceptions of value by adjusting the context in which your pricing occurs. Let's look at some specific examples of this, which may be easily applied to your pricing strategy.

Why do customers pay more for an ice cold beer purchased from a five star hotel at one end of a beach, and less when the identical beer is purchased from a run down grocery store at the other end of the beach? Because the context in which the price is paid is different. Sure, the hotel can compete on price with the grocery store. But they will be leaving money on the table, and if you can win a customer on price, you can also loose a customer on price.

The $800 bottle of wine on a restaurant wine list also provides context: it's there to make the $80 bottle of wine look like really good value for money, and the one the restaurant really wants you to buy.

But don't stop there. Always try to offer customers three choices, the technical pricing term for which is "goldilocks pricing". Give the customer one choice, and you've got a 50:50 chance of winning the business. Give them two choices, and you are forcing them to make a price-based decision. But give a customer three choices, then firstly, the question they ask themselves is "which one do I buy?", not "should I buy from this vendor?" and secondly, you are forcing them to make a value-based decision (not a price-based one).

Many SME's are reluctant to exploit pricing to its full potential. But it is the most powerful profit improvement lever any company has, regardless of their size.