I was asked by J. Bowen, in my pricing class, why Progressive Insurance (i.e., Flo) informed potential buyers of the prices charged by the competition. Why tell them they can get the same policy for less elsewhere.? A nice question since it required me to put on my thinking cap. First some homework. A visit to the Progressive web site to see how they come up with a quote. Visitors are asked a series of questions about the car (if one were trolling for car insurance), driving habits etc. (does the competition ask the same questions?). Then a choice of polices and a quote. This is followed by a link to comparable offerings provided by competitors. However, in the absence of a credit score, they are only able to furnish price ranges for some of the substitute offerings. Thus, in some cases comparisons may not be easy to make.
Now, lets turn to possible explanations.
1) They exaggerate the rivals price since it may be hard to verify. If true, it makes the whole thing uninteresting.
2) The opportunity to search for a low cost attracts potential buyers. Once on the site, inertia kicks in (laziness, warm glow etc) and as long as the price difference is small enough, they don’t depart. This may be true. If so, there is nothing about Progressive in this regard and therefore other companies should do the same.
3) For certain kinds of customers they tend to have offerings that a priced lower than the competition and others they may be roughly at par. Thus, on the special customers they don’t actually run the risk of losing them when offering a comparison.
I like (3). But, it raises a question. How is it that on these certain customers they can offer lower prices? They must have a cost advantage. Where does it come from.
From Gad Ben Zvi, another student in the class, comes an answer. Progressive believes that it can more accurately price the risk because of the specific questions it asks. Questions that others don’t. That is the cost advantage.