Lessons from Progressive Insurance

There is an interesting article in the April 2008 Harvard Business Review about how to be a successful services company, and one of the examples they talk about is Progressive Insurance. They talk about the two features of Progressive which are most distinctive and visible - their white vans, and how they list competitor’s rates alongside their own. As the article describes:

When someone insured by Progressive is involved in an auto accident, the company immediately sends out a van to assist that person and to assess the damage on the spot… Customers love this level of responsiveness and give the company high marks for service.

But customers are very price sensitive about auto insurance and so would not pay more for this service in their monthly premiums. So why does Progressive do it? Because it cuts down on fraud. Turns out most insurance fraud happens when people make claims on accidents that never happened or which were staged. This results in expensive legal costs. By dispatching a representative to the scene immediately, Progressive helps prevent this type of fraud, and even discourages it pre-emptively because people will expect a representative to show up and therefore not even attempt fraud.

 

It’s not that Progressive is determined to go one better than rivals to win the business. In fact, Progressive’s is the lowest quote only about half the time. What Progressive does believe is that is quote is the right one given the probability of that person’s getting into an accident - a probability that the insurer is best in class at determining. If indeed its quote is spot-on, then allowing a competitor to insure the customer at a lower rate is doubly effective: It frees Progressive from a money-losing propoition while burdening its competitor with the unprofitable account. Thus a level of service that looks downright altruistic to the customer actually benefits the company.

In other words, potential customers self-select not to use Progressive, but still come away feeling impressed by Progressive’s service and trustworthyness. If at some point in the future when their driving record has improved they may return to Progressive’s site and see that their price has improved, and potentially switch. So it’s a win-win for Progressive and buyers, only Progressive’s competitors lose. The perfect scenario!