#010: How Higher Price Points Can Do More Than Just Boost Profits
From Actuarial life tables to private club wine tables
Happy weekend!
The TL;DR version for today is: Price high to incentivise the "right" behaviour.
The Story:
I got into Pricing purely by chance.
I began my career as an Actuary.
There are two career options for Actuaries - Valuation or Pricing.
On my first day working, my boss told me, "Claire, you'll be our Pricing girl."
And that's how it all started.
(Sometimes I wonder, what if he assigned me to Valuation? Would my life be very different?)
The first product I priced was CTP (Compulsory Third Party) insurance, a mandatory policy for all drivers in Australia.
It covers medical expenses if you hit someone on the road, but it doesn’t cover you, hence the name, the third party.
Since CTP is compulsory, insurers are tightly regulated on how much they can charge to keep it affordable to everyone.
Limited by the price ceiling, one needs to manage the cost to improve profitability.
Calculating cost is a challenging task when it comes to CTP.
The Challenge
Take whiplash claims, the most common type from motor accidents. Some recover within weeks, while others may suffer chronic pain for years or life.
Similarly, consider paraplegic cases. Here, not only we have to account for medical costs, but also life expectancy.
My boss often joked, "It would be much simpler if they just die."
It's a cruel joke, but sadly, it holds some truth.
To manage these costs, my job involved building complex statistical models to predict which customers are more likely to have accidents (We call them "bad risk").
Once identified, we’d see how much competitors charge them and intentionally price higher, hoping they'd go elsewhere.
Pricing Beyond Improved Revenue
This early training taught me that pricing up isn’t just about bringing in more revenue. It is also a tool to maintain the portfolio's health (which implicitly leads to better profit).
Fifteen years have passed since I left the insurance industry, but I still believe that "price high to lose customers" is an under-appreciated concept.
From Actuarial Life Tables to Private Club Wine Tables
I am a wine lover, and when I lived in London, I spent much of my free time at 67 Pall Mall, a member-based wine club.
This club is filled with accomplished older men, mostly over 55, who are very knowledgeable about wines and willing to broaden their palates by tasting various wines.
They bring in the revenue (they would be the ones opening fancy bottles like La Tâche) but don’t necessarily make the club vibrant.
They would probably appreciate more variety: more females, younger members, and people who can bring more knowledge and excitement into their lives.
Grant Ashton, the founder/CEO, understands this.
In our Pricing discussion, he told me, "My average members are what I call the old, dull and stale, but they bring in the money."
"They don't like drinking with other old, dull and stale. To keep them happy, I need to create a more dynamic and balanced environment."
He did that through Pricing.
Here's the Pricing table:
Roughly, there are three key components:
1. High general membership
Attracts high-income professionals (typically working in Finance) who are passionate about wine and willing to invest in broadening their knowledge.
2. Discounted membership for young professionals
Encourages younger members to join, adding diversity to the club. Also, the pipeline for the future "old, dull and stale."
3. Discounts for trade professionals
Attracts professionals with extensive wine expertise to enrich the club’s knowledge base.
What does this mean to you?
This concept can have a lot of applications, to name a few:
1. If you are building a community
Use price to signal the quality of the community you are building and to attract the socio-economic group you want in it.
2. If you want to attract specific clients
For example. my career coach provided discounted rates to big corporate clients. "I learnt more from those clients", in her words.
3. If serving certain clients no longer is worth your while
Pricing high is the most effective way to get rid of those clients if they become too expensive to serve or cause you more trouble.
Final Thoughts
Pricing isn’t just about profit—it’s a tool to shape the quality of your community or customer base. Use it wisely.
Have a lovely weekend!
Until next week!
Cheers,
Claire
P.S. A couple of years ago, I convinced the head sommelier at 67 to let me intern there. It was an incredibly fun experience.
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