Being The Low-Cost Provider is a Costly Proposition

Low Cost Provider

By Tom Dougherty

It may come as a shock to some, but it costs a lot of money to position yourself as the lowest cost provider in any category. It’s folly because it’s a difficult market position to own and hold on to.

Low cost provider positioning is rationally based and rationally measurable, which means you have to spend, spend, and spend to maintain low-cost provider awareness and constantly adjust your margins in response to the categories response. Anyone who meets your price point owns that position in the mind of the shopper.

low-cost provider needs more than pricing to create preference
Being low-cost can be expensive

Nearly every category has a low-cost provider and, because they have to spend like maniacs to own and defend it, its share of voice often drowns out other messages. As a result, marketers and corporate executives often begin to believe that price is the final arbiter for consumers. They might even start believing any other brand position is just smoke and mirrors.

The truth is that “low-cost provider” is a failed fallback position and a marketing department or advertising agency that suggests it should be ashamed. All it demonstrates is a lack of customer insight and marketing savvy. Low-cost provider is not a brand position. It is simply an unimaginative merchandising exercise that is an operational tactic rather than a real strategy. (Read a case study on ProAssurance here)

Auto Insurance

Auto insurance is a perfect example of this principle. You can quickly spot the offenders in a category by looking for a dominant advertising spender that promises best prices and then look for copycat competitors.

auto insurance companies are sub-branding the low-cost market segment
Too many choices

Most outsiders (and even analysts) believe that the auto insurance market is driven by price and that the competition for customers is cost driven. After all, they reason, insurance coverage is quantifiable and it is possible to compare (rationally) apples to apples.

Think about the television advertising “leader” in the auto insurance category. It is near impossible to watch any TV these days without seeing a GEICO ad. It might be the old familiar caveman or the ubiquitous gecko. The, usually, 15-second spots are often bought in back-to-back lots so you get a double dose of the gecko and his sidekicks. They are intended to be humorous but humor has a short shelf life. Therefore, GEICO has to churn out a bunch of these and keep them fresh. It is a great gig for the advertising agency (in this case, The Martin Agency) that thought the campaign up.

Each spot ends with the now familiar “15 minutes can save you 15% or more on car insurance.” In other words, we are the low-cost provider of car insurance and we will be priced 15% less than what you are already paying. The genius of this position is that it is not a position at all. It is simply awareness supported by a tremendous spend on both production and media space.

Copy Cats

Because markets copy what they see (in the same way all athletic shoe companies copy Nike), the rest of the market’s players begin to feel that the only meaningful position to own in auto insurance is low price. This dynamic is reflected in the auto insurance market share

After all, the next big spender is Progressive. The exuberant “Flo” promises us that Progressive can save you a mint on car insurance (and motorcycle and RV and boat…). It goes so far as to show you how much Progressive customers have saved by switching from GEICO. I guess to be fair, rather than call Progressive the low-cost provider (which GEICO claims), I would call them the discount carrier and Flo would certainly agree and intone, “Sorry, there is no discount for agreeing with me.”

What is left for others to claim in this price-driven market? Well how about “market leader”? According to the Wall Street Journal, the Market leader is State Farm (18%), followed by Allstate (10%) and then GEICO (8%) and then Progressive (7%).

I’m not saying these market leaders have it figured out because I know they don’t. They are simply legacy carriers and are the Hellmann’s Mayonnaise of insurance companies. A default choice because they have always been there. Even in those cases, State Farm has begun to market on price (with the overwhelming GEICO media buys getting to them) and it will soon fall into the same trap. State Farm has the leadership position and will now see its share slip as it joins the mob. What they did promise and the importance of it is what we spend all of our time and effort with here at Stealing Share. (Even Nationwide, and its “World’s Greatest Spokesperson” is all about price.)

Brand Positioning

The genius of brand positioning is to put aside the obvious (like competitive pricing) and figure out what drives preference. If the Progressive and GEICO market share is a combined 15% (low cost provider positioning), this tells us that 85% of the market does not choose them. They choose someone else even though GEICO and Progressive constantly bombard them with a message of hundreds of dollars in savings every year. Finding out what these important preference drivers are is difficult work but is immensely profitable once it is uncovered.

Low-cost providers fight for every customer
Insurance providers fight for every customer

In the meantime, the category is scared because GEICO and Progressive are on the airwaves constantly. This is not because there is inevitably only one brand promise that matters but because no one can get out of its own way.

One reason why the insurance market is so lost is because these are minimum benefits in a category of insurance. Everyone believes that their insurance will be there when they need it or service them when they need it or they would not have chosen them in the first place. Those are not switching triggers. However, when that’s all your brand means, all that’s left for customers to choose is price.

So until someone in the category invests in figuring it out, the market leaders will continue to lose share to lower prices. Eventually, someone will wake up and call us. When they do, we will have another chapter to write in this defeatist category. In the meantime, I’ll wait to be called. Stealing Share is “like a good neighbor” that way.

(Read our in-depth market study on the insurance industry here)