According to a BBC News article this week, Admiral Insurance lost 380,000 customers last year.
On the face of it, it sounds dire, doesn’t it? but it isn’t. During the same period the company’s profits increased 4% to £234 million.
Admiral apparently took the decision to hike their prices by 20% in the first part of last year in response to an increase in inflation and repair costs. The move was designed to focus on maintaining a smaller number of more profitable contracts. The stock market seems to approve, in early trading the company share price rose more than 5%.
From the discussions we’ve been having with clients at Savage Macbeth, Admiral are not the only ones who are adopting this approach of focused profitability.
Several factors need to be considered when developing a price increase (or price reduction) strategy. At the heart of it though, is the walk away (our limit) and the pitch position (where we open) for the product or service price. With this information, we have the range over which we can negotiate on this goal. This area can vary widely – sometimes it might even be the same number for both positions.
Now, I’m from a sales background, and I have tremendous sympathy with salespeople not wanting to lose customers – getting the sale is in the DNA of all great salespeople. This of course can cause them a problem when they’re being asked to land a price increase – but not always for the reasons that you might think.
In some recent consultancy delivered on the formation of a price increase strategy, I asked a CEO and Commercial Director who would be delivering the increase. I was told that it would be the responsibility of the assigned Account Manager.
“Great, OK”, I said. “So, one of the first things we need to do is tell those people what the respective walk away and pitch positions are”. I was met with an immediate rebuttal – “We can’t possibly tell them the walk away position!”
The concern was that as relationship salespeople they would want to offer their customers the best possible price – immediately gravitating to the walk away position. Best case, the company gets through the lowest acceptable increase – not good news.
I asked my client what might happen if they didn’t tell their salespeople the walk away position? Slowly, it dawned on them, that without knowing the specific limit, two different scenarios might well play out:
Scenario 1 – the salesperson agrees to a lower unprofitable deal as there were no visible guidelines to work within.
Scenario 2 – the salesperson walks away from a deal that would have been acceptable as there were no visible guidelines to work within.
Neither of these scenarios were good news – and the client unsurprisingly decided that the numbers should be shared with their account managers. The good news was that the price increase went through, and profitability (like with Admiral) jumped.
The takeaway here is that as part of your planning process you need to have specificity in the numbers if you’re going to successfully effect a pricing change. Whilst Admiral remained true to this logic with their 20% (probably the same number for the pitch and walk away positions) - be careful of using rounded numbers. Odd or precise figures suggest that there’s a robust rigour that exists behind them.
Still for Admiral their plan doesn’t seem to have cost them - an arm, a leg (or even an eye for that matter, sorry Nelson) – far from it!
Sam Macbeth, 17th August
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