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.
5 comments
November 16, 2010 at 12:18 pm
michael webster
Progressive knows that people are going to shop their quote back to their own brokers – who will match it to keep the business.
Progressive allows the quote shopping to happen online to minimize this possibility.
November 16, 2010 at 12:23 pm
rvohra
But, Michael, how would this help Progressive? Second, if it did help Progressive, why don’t others replicate the tactic?
November 17, 2010 at 2:02 am
Marco
“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.”
But then again, why don’t others do the same thing!?
November 17, 2010 at 8:05 am
rvohra
Of course……should have said they have the data by which to
effectively screen based on the answers
How they come by this data and are better able to parse it…….they
would have to tell us
Rakesh
November 17, 2010 at 10:43 pm
jhe
I think it goes beyond not sweating losing the ones who they price higher; I think they are actively pushing people away.
Insurance has always seemed to me like the opposite of most businesses. In a product transaction you know your cost exactly. In insurance not only do you not know the cost of the transaction, it’s potentially very, very high. To paraphrase a former colleague, the best outcome is that you get profitable business; the second best outcome is that your competitor wins the unprofitable business.
My guess is that they have a sweet spot of customers who have a certain accident rate and credit history and an expected accident outcome which aligns with their repair network (minor dings and dents on the urban BMW, low probability of injury body work on the suburban assault vehicle – who knows) and that if you’re outside that zone it’s “Have you met get friends over at Allstate? They’ll take real good care of you.”