Nichely Done

Focus and specialisation are sources of enormous wealth.

I once asked an actuary friend of mine when I was going to die. I’m 1.93m tall; I weigh 89Kg; I don’t smoke; nor am I overweight; and to date at least I have had no major diseases or illnesses and I am not on any medication. I am fit and healthy and, in spite of anything else that may have befallen me in life, I consider myself to be a very lucky man. My friend went to the trouble of looking me up in his Tables and he told me I would die in the year 2050. I doubt very much that he was telling me the truth though, about my remaining lifespan, as I’m sure that giving some date in the far future is just actuarial good manners when faced with such silly questions. It’s silly of course as actuarial wizardly is all about statistics and all statistics come with both a standard deviation and a health warning.

Actuaries help pension companies use statistics to make money, and they have been doing it long enough to be confident that any pension payment to me, or anyone else for that matter, would reflect my actual likely lifespan, not my friend’s politically correct one.  There will always be some “winners” who benefit by living longer and some “losers” who die before the Table says they should but if you take a big enough sample size the pension company always wins. It is just a short leap of the rational mind to realise that if I was ill, and statistically likely to have a shorter lifespan, these companies could afford to pay me a higher annuity whilst I’m still around.

This idea that healthy people could get a smaller annuity than poorly ones seems obvious now I think about it, I just hadn’t thought about it until I read about Just Retirement’s recent IPO which raised £I.23Bn. It is the second time around for this company as it was taken private by some rather wise investors during the financial crisis, following its first IPO in 2006, for something like half the 2006 value. Just Retirement specialise in annuities that offer higher annuity rates for retirees with low life expectancies, such as smokers. But you don’t need to be a smoker to qualify, no, any statistically verifiable chronic illness will do it seems.

If you wonder why I am wittering on about this niche annuity supplier, it is simply that I think they are a great example of how specialisation pays dividends, or in this case IPO largesse. Focusing on a niche limits, or at least restricts and changes, the nature of competition and allows you leverage this and create higher returns on capital. All this is very attractive to investors so this IPO went well and the floatation raised about £280m, after fees, for about 31% of the company.

So, if you are contemplating your navel about how to steer your business into the uncertain future it never hurts to really understand the segments you serve. In my experience you can always apply more focus and drop the customers with the least economic benefit whilst you  focus, specialise, and exploit more the ones with higher potential returns. This simple process, if done well, based on a real understanding of what your chosen focus segment(s) really want, can make you even more of a specialist and it can work wonders with your economic fundamentals. The limiting factor is of course demand, as many businesses diversify in order to achieve scale.

Sadly, modern industrialised populations smoke, eat and drink too much so there is plenty of demand for Just Retirement and its ilk. But many businesses aren’t able to copy them with any degree of rigour as they just don’t understand their markets well enough. It is perhaps no coincidence that Just Retirement is in an industry which lives, breaths, and dies on statistics and this has perhaps facilitated this degree of niche behaviour and focus. Whilst you may not have the demand or data to do this quite as well it is always wise to consider just what opportunities you have to dig deeper into a niche market as focus and specialisation are sources of enormous wealth.

Mark

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