An innovative approach to pricing – life cover at a fixed price
(Photo credit: aWee)
Any business needs to understand its costs to be able to set a price – at least that’s one of the key things I would tell my students when I teach management accounting. Of course, another key point to mention is that sometimes the price will be dictated by the market the business is in.
If you read any of my posts, you know I like to give examples of topics I am interested in or teach. The Irish economy is not doing the best still, so I think it would be fair to say that consumers are price conscious and looking for a good deal. This means the market is leading the price to an extent. So what can you do as a business in this case. One thing is to try to reduce costs so that you make a profit at the market price. Another option is to change the product/service you offer – and I cam across a great example of this recently.
A new website emerged called www.10eurolifecover.ie. Normally, if you want to buy life assurance, you go to a broker/website and give the amount of cover you want – say €100,000. Based on things like your age and health, you get a price for the amount of life assurance cover requested. What this website does is fixes the price at €10 per month, and then tells you how much cover you can get for that amount. The idea seems like a great way to price in a market where consumers are probably more concerned with what they can afford than with the amount of cover they get.
Martin's accounting blog 
I strongly agree. And the example of the insurance broker you described is certainly an interesting one. And it can be easily viewed within the markets we see and experience nowadays. It seems that businesses offering very basic (no-frills) products tend to be more successful and profitable than others. That is why companies like Lidl, Aldi, Ikea, Ryanair, which have always run their businesses with a great deal of belief in what they were doing, are now even more convinced that their models are the winning models: offering cheap products. Identifying a price customers are willing to pay and making sure product costs are kept at their lowest. Basic products, generally. Often below their competitors’, in terms of quality.
That requires a solid and disciplined approach to cost control. But it is likely to pay off, eventually.
If I had to mention a case I found interesting enough, that would definitely be the model Ikea follows when developing a new product. They start from a gap to be filled in their product portfolio (say a certain type of wardrobe for children’s rooms). Then they set a competitive price for it. Subsequently, they make sure product costs allow them to reach the target profit they set for that product (and that is perhaps mainly an issue for their suppliers). That is an example of extreme target pricing, if you like.
Thanks for the comment Nicola