Any idea on the advertising budgets of these two companies, and how much cheaper their insurance would be if they cut their advertising budget in half?
I could live without seeing the weird, red-lipsticked chick from Progressive every 10 minutes, not to mention that stupid gekko, the cavemen, et. al. from Geico.
I won’t buy insurance from these companies primarily because of the incredible money they pour into their advertising. I’m sure it has increased their business, but their ad. budgets have to have a severe impact on premiums.
The ads won’t impact the cost to the consumer long-term, only short term (and for established companies, that short-term period is over). If the ads serve their purpose, and money is properly reinvested from the revenue, you can offer products cheaper.
(Great) companies take profits, generated partly from ads, and reinvest in various efficiencies. They leverage the new revenue to lower their costs.
You can invest in better phone systems (that work), better call centers (that have more efficient agents), better computer models, and and all sorts of things to keep costs down.
McDonalds and Coke (ad leaders) don’t cost more than Burger King or Pepsi, their competition. Big companies can afford to advertise and offer competitively priced products. Sure, it costs more for a Coke than it does for Bubbly Generic Cola Slop. If Generic Insurance Slop policies work for you, go for it.
Insurance is even more interesting, because a huge customer base makes their biz model even more predictable/stable.
I agree with Philster. In the United States, the advertising industry, which annually rakes in about $500 per American citizen per year, gets its funding in some way that is never passed along to consumers or anybody else.
I am not in marketing, but I think a relevant number is the “customer acquisition cost.” Let’s assume that Geico spends $500 million each year on advertising and gets one million new customers each year (all numbers are made up). So it spends $500 to get each new customer. That, as I understand it, is the customer acquisition cost. Now, $500 is a lot of money and might actually exceed the profit for the first year or so. But in my experience, most people do not change their auto insurer very often. So once they acquire this customer, he or she might be expected to stay with Geico for five or ten years. Any smart company is careful to calculate its customer acquisition cost, and make sure that it’s not losing money by spending too much to bring them in.
Back in the days of the dinosaurs when I worked for an insurance company in a department handling mutual funds, I saw pretty much the same thing. Customer acquisition costs were somewhere in the neighborhood of two years profits in some lines of business. An absolutely absurd figure. But they were counting on the fact that the average customer was around for a lot longer than that, so they made a long-term profit.
Of course, sometimes the numbers can be played by the Evil Forces of Marketing to a company’s detriment. The List Processing game is especially good at sucking in companies and spinning numbers to assure you that by mailing everyone in the known universe several times a month, you will eventually make your money back. Witness the downfall of companies like Gurneys (the seed catalog people) as a good example of that. Order $5 worth of seed or plants one time, and in years past, you would be flooded with 3-5 catalogs per years plus other mailings for years to come. Cabelas is another one misinformed or misusing this. I ordered ONE thing for $200 from them years ago, and I keep getting these massive catalogs from them every year. They’ve long since spend the profit they made from me several times over trying to sell me more stuff.
So to summarize, the Ad agencies can spin the numbers showing that if you spend N amount, you’ll get N+m back. But it doesn’t always work that way.
GEICO and Progressive have no-name actors doing simple ads. Meanwhile Allstate hired Dennis Haysbert to do a series of ads for several years. I wonder which campaign was cheaper?
As noted, insurance, moreso even than other industries, gets more profitable the bigger your customer pool is because you spread your risk around. So if Flo manages to hook some new customers for Progressive, it actually can make the insurance cheaper for existing customers.
Yes, maybe they could charge less if they spent less on advertising (although that is not certain), but so what? I dont see why that should affect your purchasing decision. If Nationwide costs $1000/year and GEICO costs $900/year, are you really going to choose Nationwide because you think GEICO premiums are inflated?
Insurance is a unique business because some of the big players are mutual companies which means they have no stockholders that get the profits. The mutual companies are essentially owned by the policy holders - 2 big examples are State Farm and Liberty Mutual.
A lot of these insurance companies advertise on slots that aren’t all that competitive. So it’s not that expensive in the long run. They just have to balance so many new customers versus the cost.
Plus if you get a run-a-way hit, like Safe Auto’s “Justin Case,” you can take a low paid actor and it runs away.
Add to that these companies appeal to people who will pay the minimum and may never put in a claim. For instance the deductable is so high that they never will cough out the money, but it keeps the driver “legal for less.”
Only one datapoint here but I went from an insurance company that does not advertise to Progressive and my policy went from $1850 per year to $790 for the same coverage. I would say that they are clearly more than making up for the difference in advertising costs with other efficiencies. I expected them to jack up the rates after they hooked me but after two years it is still under $800.