I may be out on vacation this week, but I’m still bringing you some content!
My first session at the P3 conference on Friday was titled "Imitation is the Sincerest Form of Flattery: Borrowing Lessons in Pricing and Metrics from Other Industries." If you’ve been reading Zen for any length of time, you’ll know that I’m a big fan of looking to other industries for new ideas. And in P3 that’s especially helpful, since we’re not reinventing the wheel here – a lot of the challenges firms face have been seen in some other way somewhere else.
The program description states:
As the legal services industry continues to define what works and what does not in the opaque world of pricing, efficiency and process innovation, one can’t help but notice that other industries have been doing these things for quite some time, and not without success."
‘Borrowing’ best practices from others is a business best practice itself, and this panel of pricing professionals from non-legal organizations will share their methodologies, observations and recommendations that will provide both law firm and corporate legal department executives with food for thought on methods for addressing some of the challenges they face and finding effective solutions to conquer them."
We had Keith Maziarek of DLA Piper moderating Michael Boussy of Ropes & Gray, Prasad Kholkute of United Airlines, and Brian Donlan of Emcompass Insurance (Allstate).
Kholkute immediately put the room at ease when he joked that the airline industry is great at "creative pricing." That being said, he also emphasized that United is trying to change the culture of price wars among airlines.
Speaking of culture, that’s also important internally. Donlan shared that they’ve provided guidelines to their pricing team to allow more agility. Boussy provided the law firm perspective (as well as perspective from his time in-house), saying that lawyers are different – they don’t want to work for lower prices because it’s "insulting." In other industries, sales people will undercut prices just to win business, regardless of the effect, but you don’t see this in legal.
Kholkute noted that pricing should be designed to maximize profit, not revenue. And when moving from revenue maximization to profit maximization, you have to start with top management – that’s a theme we heard many times throughout the conference. It’s also helpful to have training and mentorship in place when you’re shifting the culture.
Donlan commented that the insurance industry is different to others (lawyers, does that sound familiar?) because they’re much more affected by weather than by economics. Allstate lost $2.3 billion following Hurricane Katrina. The knee-jerk reaction after a loss like that is to raise rates, but the pricing structure needs to be more sophisticated than that.
Challenges & Benefits of Data
Using data was another major theme of the conference, and this session discussed it as well. Boussy told us that we shouldn’t be fooled into thinking that data is perfect in other industries; it’s not. The first step is to scrub the data to make sure that it’s good.
After coming up with prices using customer segmentation, you want to track the win/lose rate for customers and segments and develop a history. Also, put in a mechanism that compares estimated costs with actual costs.
Although there are lots of challenges, there are also creative ways to go after data. Donlan talked about getting data from Jostens about the purchase of class rings to indicate that there’s a young driver in the household. How can law firms apply this kind of thinking to what they’re doing?
Kholkute added a final word to the data discussion, saying that it’s better to be approximately right, than perfectly wrong.
Let’s Get Creative
Next, the panelists talked about how they get creative with what they’re doing in terms of pricing. Kholkute said that the airline industry went the unbundling route – so now we pay individually for the cost of soda, the flights, bags, etc. Their thinking for this was to segment customers into what they want, and then price that accordingly. The airline industry mostly segments their buyers into those traveling for business and those traveling for pleasure. They use certain characteristics to determine business travelers, and they set prices higher than otherwise.
For Donlan, it’s about creating lifetime customer relationships. People are less sensitive when it comes to homeowner’s insurance versus car insurance, so they try to leverage that. Allstate went from incentivizing raising rates to thinking more strategically about the business.
The panelists suggested using price targeting when finalizing your price points – it’s a simple metric to see how you’re doing. They said that pricing professionals need to understand the numbers, but they don’t need to be covered in every deal.
Boussy said that sometimes you need to change the game – work together to win business instead of being at odds.
Technology plays a big role for everyone too. Donlan said that it’s huge for insurance, and United is also looking at ways they can use technology to maximize profit. Boussy mentioned a program that they used that allowed them to identify what to price everything for various customers and where to upsell (from his in-house days).
But no matter how good the technology is, if you can’t output something that you can read on a mobile device, it’s not going to work. Data needs to be portable, so that executives can access it, make decisions, and get back to you.
An audience member asked how you overcome the idea of using low prices to get in the door, and then raising them later? Boussy said you need to invent a loss-leder approach, but only for a period of time rather than at a certain price. He suggested you build in the step-up to normalcy in any deals that you make to bring in clients.
Another audience member asked how price increases should be introduced? Kholkute advised that you should strive to maximize profitability, and segment customers for price increases. It’s important to be transparent about them, and not to try to sneak them in. Allstate has data that reinforces this idea that when you’re transparent, customers will stay, rather than when you raise rates and just hope they don’t notice. Boussy agreed that messaging is key, as well as being calculated about who got the price increase and how much the price went up.
We were then at the end of our time! Only one more session to report on, which you’ll see on Wednesday, before we close out my P3 reporting!