Principle-Guided Fair Pricing
Set explicit pricing rules before commercial pressure distorts decisions
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 93%
Principle-Guided Fair Pricing establishes a small set of non-negotiable rules before actuaries, analysts, or commercial teams set individual prices. The framework first determines the adequate rate needed to cover claims, expenses, and capital requirements. It then tests whether similarly situated customers are treated fairly, whether any group is subsidizing another, and whether loyal customers are disadvantaged relative to newcomers. Material changes are communicated before they become a surprise. The mechanism converts broad values into constraints that guide thousands of decentralized decisions, especially when experienced employees bring habits from differently structured companies. It does not mean freezing prices or avoiding necessary increases. Instead, it requires every increase, discount, and risk classification to satisfy both financial sustainability and declared customer-treatment principles. Regular audits reveal when market pressure or legacy assumptions have caused pricing to drift.
Origin
Ross Buchmueller described principles Pure established for its actuarial and pricing team so it could charge adequate rates while treating existing members and risk groups fairly.
Core principles
- 01Pricing must sustain the business
- 02Existing customers should not subsidize introductory discounts
- 03Comparable risks should receive comparable prices
- 04Customer fairness and rate adequacy must coexist
- 05Explicit principles reduce judgment drift
How to run it
- 1
Define the Pricing Commitments
Write a concise set of rules governing loyalty, adequacy, transparency, and cross-customer fairness. Give the pricing team clear boundaries rather than vague aspirations.
Pro tip Express each principle as a decision test that can produce a yes-or-no answer.
Watch out Principles that contain no operational constraint will not change pricing behavior.
- 2
Establish the Adequate Rate
Calculate the price required to cover expected losses, operating expenses, and an appropriate capital return. Use current risk evidence rather than inherited assumptions.
Pro tip Separate the cost of risk from the cost of capital so each can be challenged independently.
Watch out Customer-friendly pricing that underfunds future obligations is not genuinely fair.
- 3
Test Cohort Fairness
Compare prices across new customers, loyal customers, and relevant risk groups. Identify introductory discounts, legacy penalties, or unintended subsidies.
Pro tip Review effective prices after discounts and fees, not just headline rates.
Watch out Aggregate profitability can conceal severe unfairness between cohorts.
- 4
Review Material Changes
Flag valuations or rates that change beyond a defined threshold. Require a human explanation and evidence review before communicating the result.
Pro tip Contact the customer before issuing a report that would create a significant surprise.
Watch out A technically correct adjustment can still feel like a bait and switch when handled poorly.
- 5
Explain the Decision
Show the customer which risks, values, or costs changed and how the principles were applied. Provide a route to correct inaccurate assumptions.
Pro tip Use line-by-line explanations for unusually large adjustments.
Watch out Do not hide a material increase behind actuarial terminology.
- 6
Audit for Drift
Periodically test real prices against every declared principle. Correct algorithms, employee practices, or product rules that have created inconsistent outcomes.
Pro tip Include long-tenured customers in every audit sample.
Watch out Legacy software errors can persist for years when nobody rechecks the underlying rules.
In the wild
Pure established a rule that existing members would always pay less than equivalent new members. The rule constrained actuarial and commercial decisions while the team still sought an adequate overall rate and avoided unfair subsidies between risk groups.
→ Pricing decisions supported loyalty without abandoning financial discipline.
When an appraisal increased a home's value by more than ten percent, Pure required the appraiser to pause the report and call the member. The appraiser reviewed the valuation line by line so errors could be corrected and the customer understood any resulting premium change.
→ Necessary coverage corrections produced less surprise and were less likely to feel like a bait and switch.
Common mistakes
Discounting New Customers at Renewal's Expense
Introductory discounts can quietly make loyal customers fund acquisition. Compare equivalent new and existing customers before approving campaigns.
Confusing Fairness With Uniformity
Different risks legitimately require different prices. The goal is consistent treatment of comparable risks, not identical pricing for everyone.
Issuing Surprise Adjustments
A large unexplained increase can destroy trust even when the underlying valuation is correct. Review and communicate material changes before billing.
Is it for you?
Best for
It is best for insurers, subscription businesses, and other firms making repeated pricing decisions across customer cohorts.
Not ideal for
It is not ideal for one-off negotiated markets where products and risks cannot be meaningfully compared.
From the transcript
“treat your loyal customers better than you treat somebody you've never met.”
“the existing members will always pay less than a new member”
“to try to be fair amongst the members, so you don't have subsidization where some groups are not paying nearly enough and some groups are…”
From the episode
Interview With Ross Buchmueller: Masters in Business (Audio)
Ross Buchmueller