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Progressive Corp. Take-Aways. Progressive’s “recipe” for Competitive Advantage. Identify a profitable and growing customer segment of the market: “Mis-priced” non-standard clients Key problem: Customer retention Solution: Create superior service

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progressive s recipe for competitive advantage
Progressive’s “recipe” for Competitive Advantage
  • Identify a profitable and growing customer segment of the market:
    • “Mis-priced” non-standard clients
  • Key problem: Customer retention
  • Solution: Create superior service
  • Main point: Pricing and service are complements
progressive s competitive advantage in non standard
Intelligent pricing

sophisticated historical database of non-standard customer attributes & accidents

better ability to rate customers (i.e., estimate risk)

more prices (14,000)

product managers

Express Quote 1800

Better Service

Immediate Response

24/7 operations

Empowered, trained adjusters

Measure performance of service organization

lag between claim filing and closure

fraction of open claims

tied to incentives

Fast Payment

Find the “right” customer segment

Increase Customers’

Willingness to Pay

Progressive’s Competitive Advantage in Non-Standard
the price is right
The Price is Right
  • You are bidding to acquire a client list from a rival firm
  • The value of the client list to the rival is from $0 - $9 with equal probability
  • Because of your superior service, the client list is worth 50% more if you acquire it
  • The rival will accept any price for the list which is at or above its value
  • How much should you bid?
equilibrium analysis
Equilibrium Analysis
  • The only sensible bid is not to bid at all
  • Why?
    • You “win” only in circumstances where the list is least valuable.
    • Suppose you bid $3.
    • Then you win when the list is worth: 0, 1, 2, or 3 (each equally likely)
    • Your profits from the acquisition are:
      • .25 x $9 < $3
      • So you actually lose money on average
mis pricing is a major driver of cost in insurance

“Dumb” Player:

Charge $1200 to everybody

“Smart” Player:

Charge $1150 to Medium and Low Customers, $2000 to High Customer

Gets only high risk customer

loses $800

Gets medium and low risk customers, makes $900

Mis-pricing is a major driver of cost in insurance

Expected Loss: $1200 / customer

questions about progressive s competitive advantage
Questions about Progressive’s Competitive Advantage
  • How sustainable is Progressive’s competitive advantage in non-standard?
    • how long would it take other firms to develop the same (or better) pricing expertise?
    • Product advantage versus competitive advantage?
  • Can Progressive’s competitive advantage in non-standard be transferred to the standard segment?
    • do they have better pricing skills in standard? can they develop them faster than others?
    • can competitors in standard copy Progressive’s Immediate Response System?
      • do they have the incentives to do so?
progressive performance highlights
Progressive performance highlights
  • Expansion in other non-standard segments:
    • 25% market share in 2002 for motorcycles (#1 player)
    • nearly 2M total policies for motorcycles, mobile homes, watercraft, snowmobiles, and homeowners
  • Shift to direct channel:
    • Approx 30-35% of new auto policies acquired via direct channel
progressive strategy in 2004
Progressive strategy in 2004
  • Maintain focus on 4% underwriting margin
  • Continue to build direct distribution strength (I.e., Internet)
  • Compete in standard
  • Strategic principles remain high-service and focus on risk segments in which Progressive has a pricing advantage