On the road with Richard Howells: The price is right

Zurich UK Life's Richard Howells says there are three key components to consider when building a new business model. The first? Price.

In my last column I set out to establish a pattern of priorities for a business owner to consider when building their future business model.

The starting point as I said before has to be an understanding of where you are going from a strategic perspective.

In simple terms that manifests itself by addressing questions about what the business will be and how it will create and maintain competitive advantage, allowing the business to enjoy the benefits of having a significant market share.

In deciding the strategic direction we set out three main methodologies which over the course of the next three articles we will discuss in more detail.

Before we look at the detail, it's worth noting that a business is not restricted to just one of these methodologies. Many businesses operate multiple strategies. Whilst this is a valid approach, there is a need for a degree of caution as the business owner needs to ensure that the strategies do not conflict in such a way as to make the result less desirable.. In addition, care must also be taken not to try and do too much as you could end up spreading yourself too thinly.

With the health warnings out of the way, let's discuss the first of our three options:

PRICE PLAY

For advisory businesses it is difficult to operate this strategy successfully, unless the service you deliver can be commoditised in some way.

Examples of this could be rate-driven protection business or execution-only investments. Advice in its purest form centres on value and therefore cost is only part of a customer's consideration.

If you manufacture a product or can commoditise all or part of your business then providing your service for less cost to the customer can be a winning formula. The trick is delivering to customers' expectation at an acceptable profit margin.

It can be weighed up like this:

Customer's willingness to pay v Range of pricing available v Cost of providing service

The first line in this diagram needs careful management as to win with this strategy requires you to pitch your price typically just below that of the competition from which you seek to take market share.

The bottom line of the diagram also requires close attention. Kaizen is a concept that was first developed by the Japanese and translates to something we now call 'continuous process efficiency'.

Future advice models operating this strategy will need to assess whether there is the available manpower that can do some of the work more efficiently than the manpower already in place.

Additionally, and more typically, the introduction of technology including a back-office system and wrap or platform propositions will drive efficiency within the engine of the business and as such must be a serious consideration.

In addition to becoming more efficient businesses must look for cost savings from within their own supply chain. In a financial services context an advisory business would need to establish who it buys from to see if there are any ways of renegotiating terms to achieve a better result.

Being successful in the price game requires a commitment to build your business from the ground up with an intense focus on process efficiency and thin costs. Trying to mould your existing business into one with the infrastructure and capability to maintain a price play strategy is difficult. A better option is to look at a completely fresh business model without the baggage and existing cost inherent within a mature business.

In the next article we will discuss the second of our strategic options, that of 'proposition differentiation'.

In the meantime let's hope the economic recovery continues and the advisory sector can continue to go from strength to strength.

Richard Howells is intermediary sales director at Zurich UK Life