Life and Health Marketing (LOMA) - Chapter 12 - PRICING: A MARKETING PERSPECTIVE

Pricing - the process of determining the amt to charge a customer for a product
Primary Factors Affecting Pricing Decisions

Pricing Objectives - goal co wants to achieve when pricing profit
- ideally stated in writing so they can be verified against actual results
- Profit-Oriented Pricing objectives
  - Profits (or contributions to surplus)
  - Target return objective - specific level of profit as an objective
    - often used to evaluate performance
- Sales-Oriented Pricing Objective
  - Mkt share
  - Types of competition-oriented pricing objectives
    - - discouraging the competition
    - - beating the competition
    - - meeting the competition
  - nonprice competition - product features, quality customer service, etc
Cost - a big unknown since costs not known until blocksize = 0
- projected costs a big estimate
- some costs hare to split by product
- Direct Cost - directly attibutable to the product (u/w cost/comm/etc)
- Indirect Cost - not directly attributable (rent/shared services/etc)
- Fixed Cost - constant regardless of volume sold (rent/utils/prod dev/etc)
- Variable Cost - varys w/ volume (pol issue/prem tax/comm/etc)
Demand - determines upper limit of products' price
- Price Elasticity - % change in qty demanded / % change in price
- Elastic Demand - change in price results in greater than proportional change in qty demanded
- Inelastic Demand - change in price results in less than proportional change in qty demanded
- Price elasticity depends on
  - - number of substitute products available
  - - need associated w/ product
  - - level of expenditure req'd to purchase a product
Customer Influences
- Purchasing Power (aka buying power) - measure ability of customer to buy goods and services
  - affected by economic conditions - inflation/taxes/unemployment
- Price Consciousness - importance that customers attach to price
- Price Flexibility Desired - guaranteed price stability vs risk of higher price for chance at savings
Competition
- - number of competitors and competing products
- - cost factors assoc w/ product and level of costs facing each competitor
- - level of fin resources avail to each competitor
- - level or resources each competitor has already commited to product
- - historic pricing behavior of each competitor
- - expected reaction of each competitor to price changes
- - each competitors overall strengths and weaknesses
Regulatory Requirements
- need apporval for healt ins rates. Normally not for life ins
- solvency requirements
- XXX
Other Mktg Mix Variables
- Type of promo efforst, form of distribution and product (features, benefits, levels of service, etc) aslo affect overall price

Pricing Strategies

Cost-Driven Pricing Strategies
- establish price that will cover all costs and profit objectives
- most effective if a market leader
- might also work if
  - - exclusive agent force
  - - little competition
  - - exclusive access to customer base (worksite)
  - - fraternal
- can be problematic in competitive mkt situations
Competition-Driven Pricing Strategies
- base price on competitors price and place in market hierarchy
- adjust conversion/renewability options, commissions to arrive at price (ie. products modified to fit price)
- Penetration Pricing - low price to build mkt share
- Flexible Pricing - negotiable price w/ each customer
  - competitive bidding
  - negotiated contract
Customer-Driven Pricing Strategies
- usually focuses on compensation element of pricing
- focus on "product value"
- Psychological pricing - certain types of prices more appealing to customers
  - 99.95 vs 100 or monthly vs annual
- Price Skimming - charging highest possible price that customers who most desire product will pay
  - more true for tech than for fin services
- Promotional Pricing - lower (than normal) prices on certain items to stimulate all sales
- Price Leaders - low cost products to attract customers to all products at regular prices
- Loss Leaders - price leaders priced below cost

Rate Structures

Preferred Risk Discounts - better rates for those with characteristics of loewr mortality
Quantity Discounts - rates graded by size of policy
- banding
- policy fee system
Gender Based Pricing - like PRD - know difference in M/F mortality
Market-by-market pricing - different rates by jurisdiction/geor area/target market/prem taxes/mandated product features/reserve requirements
Contingency Pricing - adjustable premiums/experience refunds
High & Early cash value pricing - used on UL for early buildup of Cd
- intial prem rates higher to pay for this
High and Late CV pricing - lower early prems
- discourages early surrenders w/ SC
Indeterminate premium pricing - dual prem structure - curr and guar

Pricing Methods

specific procedure co uses to set final price (or price structure) for a product
cost-based/competition-based/customer-based
Asset Share Calculation
- Asset Share - amount of assets a block will have accum at any given time
- Asset Share Calc - mathematical simulation of A/L/Surp interaction over years on a block
- Basic steps
  - - establish gross prem based on estimate costs/demand and competition - starting point
  - - choose conservative mort talbe and int rate to calc products reserves
  - - choose more liberal mort and higher in to estimate NP req'd to pay benefits
  - - choose a div assumptoin, expense rate, lapse rate nad profit margin objective for all years
- Validation period - breakeven period - time req'd for product to become profitable or begin adding to surplus
- Validation point - end of validation period
- if validation period is too long, co will abandon product or adjust assumptions
  - increase GP or lower benefits/expenses

Price Evaluation

assess
- - price's impact on co's fin performance
- - impact on performance of producers & other distributors
- - reactions of both competitors and customers
factors to monitor
- - investment margin
- - u/w margin
- - expense margin
- - lapses (diff between actual and expected)
- - taxes (actual vs expected)

Product Line and Portfolio Pricing Considerations

Pricing a Product Line
- rank each item from lowest to highest price and determine price of each item
- need price set to cover all product line costs
- if one item is priced low to meet competition, other need higher prices to make up diff
Pricing a Product Portfolio
- need ot ensure all products cover all costs
- model office - whole co model - can help verify pricing is correct for entire portfolio

Copyright © 2004 Steve Welander.
Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation; with no Invariant Sections, no Front-Cover Texts, and no Back-Cover Texts. A copy of the license is included in the section entitled 'GNU Free Documentation License'.