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“Business is like war in one respect. If its grand strategy is correct, any number of tactical errors can be made and yet the enterprise proves successful.”

-General Robert E. Wood

President and Chair of Sears Roebuck (1928-1954) and founder of Allstate Insurance.

Content created by Darin Gerdes, copyright Great Business Networking.
Every organization has access to resources that they convert into final products or services. They don’t all have the same exact resources, but very often the resources are similar within the same industry. The difference is how they reconfigure or leverage the resources based on their company’s core competencies.[1] This is how firms create value.
Companies have different core competencies and different abilities to deliver what the consumer wants. For that reason, they select different strategies. A strategy is “an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage.”[2] The most common strategies are cost-leadership, differentiation, and focus strategies.
 
Cost, Differentiation, or Focus
Cost-leadership is a strategy to be the low-cost provider. Organizations that apply this strategy seek to gain customers by undercutting competitors. All other things being equal, it works, but there are dangers to a cost-leadership strategy. Low-cost producers have to be incredibly efficient or they destroy their margin. Often, there’s no barrier preventing a competitor from doing the same things you’ve done, igniting a price war. In addition, quality is often compromised in the quest for low-cost dominance. Without a clear core competency that gives you an advantage, cost-leadership is a strategy that may backfire.
Wal-Mart is a low-cost provider, but Wal-Mart is safe because it built the premier distribution network, and that distribution network helps them operate efficiently. You can get a carton of Breyers ice cream from Wal-Mart for $2.98 or from Harris Teeter, a more upscale grocery store chain, for $5.98. If you only look at the price difference, you would think that Harris Teeter has fat margins, but their margins are not as large as you would think. It costs Harris Teeter more to get that ice cream through their distribution system and into the freezer case. Wal-Mart makes up much of the difference through an efficient distribution system and through velocity.
Many companies pursue a differentiation strategy. They emphasize how their products are better in some way than others in the market. If the customer finds the differences valuable, they can often charge more. Harris Teeter stays in business because they provide a different type of value. The store feels different. They sell some goods that Wal-Mart does not stock (e.g., high end, gourmet, international, and artesian products). This attracts a different set of customers.
Other companies select a focus strategy where they choose to limit themselves to a narrow niche market. If Wal-Mart is the low-cost provider, and Harris Teeter is differentiated, the small Hispanic food mart pursues a focus strategy.
 
Strategy in the Auto Insurance Industry
To the consumer, car insurance is car insurance. Generally speaking, the consumer wants insurance that covers his needs adequately for the lowest price. When he has an accident, he does not want a hassle. He expects a timely response from a company that keeps its promises. That summarizes what the consumer wants in auto insurance. Now, think about the advertisements you’ve seen for car insurance on television and you will recognize the different strategic positions that companies are staking out:
 
Cost-Leadership:
Geico: “Geico: 15 minutes could save you 15 percent or more on car insurance.”
esurance: “esurance was born online and built to save and when they save, you save.”
 
Service:
State Farm: “Like a good neighbor, State Farm is there.”
Allstate: “You’re in good hands with Allstate.”
Nationwide: “Nationwide is on your side.”
 
Flexibility:
Progressive: “Now that’s Progressive.”
Liberty Mutual: “See car insurance in a whole new light.”
 
Focus
USAA: “We know what it means to serve.”
AARP The Hartford: “Age 50 or older? 4 out of 5 AARP Policyholders saved.”[3]
 
Let’s unpack each company’s value proposition. Geico and esurance clearly have a cost-leadership strategy. If you compare rates, you will find that you cannot do much better with a well-known national brand. Others talk about low prices, but their real value proposition lies elsewhere. Nevertheless, most insurance companies try to lure customers with low prices even if their primary strategy is differentiation or focus. Here is what each company says about savings on their respective websites:
Geico: “New car insurance customers report average annual savings over $500.”[4]
Allstate: “Drivers who switched saved $446 on average.”[5]
Nationwide: “We offer many ways to lower your auto insurance rates, including good student and multi-policy discounts.”[6]
Progressive: “You could save nearly $600 on auto insurance”[7]
Liberty Mutual: “Switch and you could save $509 on car insurance.”[8]
USAA: “Members who switched to USAA saved an average of $376 a year”[9]
AARP The Hartford: “*Savings amounts are based on information from The Hartford’s AARP Auto and Home Insurance Program customers. . . Average auto insurance savings for the period was $420”[10]
 
If you can save so much money by switching, it makes you wonder who is choosing to pay exorbitant rates for auto insurance. Of course, the studies are a bit suspect because those who switch will not likely voluntarily switch from a lower rate to a higher rate, so the savings is always baked into the pie—at least for any study that is made public. This should be a warning. If you do not see a study about how much you can save, be careful.
If you make a few calls and compare apples to apples, you will find that Geico and esurance truly are the low cost providers. This is interesting because esurance is a subsidiary of Allstate.
Allstate selected a differentiation strategy, focusing on customer service. If a customer is primarily interested in service, State Farm is like a good neighbor, Nationwide is on your side, and you are in good hands with Allstate.  Service is a legitimate way to add value too.
Perhaps a customer needs greater flexibility. Progressive allows them to compare their rates with competitor’s rates and offers the Name Your Price tool. They reverse the process by asking how much the customer wants to pay. Then, they provide policies that most closely match coverage that fits the stated dollar amount. Progressive is savvy in this approach. They explain the Name your Price process as follows:
First, tell us what you want to pay.
Enter what you want to spend each month on your car insurance.
Review the policy that’s closest to your price.
We highlight any areas where you might be short on coverage.
Buy your Perfect Policy.
Bring home the savings you want with the protection you need.[11]
Liberty Mutual also focuses on flexibility with specific packages such as accident forgiveness, the deductible fund where your deductible goes down by $100 per year for every year with no claim, and better car replacement which covers replacement of a year model newer if your car is totaled. Each package allows the company to add an extra premium over basic coverage.
Some companies choose a niche, or focus strategy. Are you a member of the military? USAA just serves the military and they understand your particular situation. Are you over fifty years old? The Hartford partnered with AARP to serve seniors aged fifty years and older. This can be a winning formula if a company can focus their resources to get a larger share of a smaller market.
 
Common Strategies
There are a few strategies that are common to most insurance companies. Most companies have a base price and then they offer a number of discounts that make the customer feel better about the final price. This is called anchoring and retailers do it all the time. If you have ever heard of a MSRP (Manufacturer’s suggested retail price), you have been a victim of anchoring. The MSRP puts a price in your mind such as $1800 so that when you get discounts that reduce the cost down to $1500, you feel like you have gotten a good deal.
Remember the ice cream I mentioned earlier? Harris Teeter had marked down their ice cream from $5.99 to $5.48 for a limited time. This was still much higher than the $2.98 at Wal-Mart, but this higher cost with periodic discounting model is part of Harris Teeter’s strategy.
In auto insurance, common discounts include: accident free discount, good student discount, defensive driving course discount, low mileage, affinity discount, and full payment discount.[12] Of course, this can be deceptive. The important number for the consumer is the final cost, not the number of discounts, but focusing them on the number of discounts is a clear strategy.
 
 
Most insurance companies seek to steer you into paperless billing to cut costs. Many insurance companies use the internet as a direct portal to acquire an insurance quote online, though some, such as State Farm, route you to a local agent. Some have their own aps for their services.
Insurance companies also recognize that once they have sold a customer one service, it is easier and more cost effective to sell them another service. So, they offer bundles that provide a discount for those who acquire both services. This is a win-win for the customer and the company. The customer gets a discount by switching over. The company acquires another account while forgoing their customer acquisition cost. Moreover, the discount provides a margin of safety for the company as it less likely for the customer to leave for a cheaper competitor since the discount will be revoked.
 
Business or Personal
The same strategies that work for a large business can work for a small businessman. Can you be (or do you want to be) the low cost leader? If not, how do you differentiate yourself? Do you offer personal service. Be careful, because personal service can be copied. Are you already a member of an affinity group (club, church, school, ethnicity, profession, etc.) in which you can focus your sales?
Whatever you do, be sure that you pair your competencies with the appropriate strategy and be sure that your offering is valued in the market. Be intentional about your strategy. Think about the best road for you to deliver what you have to offer and then execute that plan.
 
Actionable items:
 
What is your core competency?
 
Convert your core competency into a winning strategy. Are you the cost-leader or do you use a differentiation strategy, focus strategy, or some combination of these strategies?
 
 
End Notes
 
[1] Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2015). Strategic management: Competitiveness & globalization: Concepts & cases. Stamford, CT: Cengage Learning. (p. 77).
[2] Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2015). Strategic management: Competitiveness & globalization: Concepts & cases. Stamford, CT: Cengage Learning. (p. 4).
[3] AARP auto and home insurance program. (n.d.). The Hartford. Retrieved from http://www.thehartford.com/internet-sales/aarp
[4] More than just car insurance. (n.d.). Retrieved from https://www.geico.com/
[5] Allstate auto insurance. (n.d.). Allstate. Retrieved from http://landing.allstate.com/auto/desktop/hp/brand?TFN=18663775804&CAMPAIGN=444490000027245&CMP=KNC-GG-AU-027245-140925%3aallstate+auto&ad=&zipcode=&Affcode=p10425245281&gclid=Cj0KEQjw0f-9BRCF9-D60_n4rKcBEiQAnXW4-5XysWysK1WZ0H3Cz8jjNYZglnOSCn2IzK5NlJrByUAaArhF8P8HAQ&gclsrc=aw.ds
[6] 7 reasons to choose Nationwide for car insurance (n.d.). Nationwide. Retrieved from https://www.nationwide.com/car-insurance-policy.jsp
[7] Car insurance quotes. (n.d.). Progressive Casualty Insurance Company. Retrieved from https://www.progressive.com/auto/
[8] Car insurance. (n.d.). Liberty Mutual. Retrieved from https://www.libertymutual.com/auto
[9] Auto insurance. (n.d.). USAA. Retrieved from https://www.usaa.com/inet/pages/auto_insurance_main?wa_ref=pub_global_products_ins_auto
[10] AARP Auto and home insurance program. (n.d.). The Hartford. Retrieved from http://www.thehartford.com/internet-sales/aarp
[11] How Name Your Price works in three simple steps. (n.d.). Progressive Casualty Insurance Company. Retrieved from https://www.progressive.com/auto/name-your-price/
[12] A number of excellent comparisons are available online including Davis, L. (2015). Which company has the most car insurance discounts for you? Bankrate. Retrieved from http://www.bankrate.com/finance/insurance/car-insurance-discounts.aspx