Case study: Allstate’s transformation

The story.

In the early 1990s, Allstate had kept its competitive advantage due to its sophisticated pricing model for auto insurance.

At the time, the insurance industry largely developed products and services by focusing on price correlated to risks for a profitable return. As a result, the only differentiator for consumers between companies was price.

The challenge.

Allstate’s advantage began to erode as competitors developed stronger models. The company needed to identify a new way to maintain its lead.

The solution.

Allstate decided to study consumers more closely. Meeting the needs of different customer segments was widely used across many industries but was not common practice in the insurance sector. Instead, the industry tended to treat consumers as a set of undifferentiated groups and the primary consideration was pricing risk for profitable return.

Allstate simply adopted this approach and put consumers with their individual differences at the core of its product and service planning. This was transformational in the insurance industry.

Tom Wilson, the company’s chairman, chief executive and president, directed efforts around understanding what consumers would be willing to pay more for if they received incremental value on the product. H ow individuals made decisions became the key metric for determining how Allstate designed and priced its products.

Rethink the model.

Allstate decided to create a new product called “Your Choice Auto” in 2005. This created several tiers for consumers that would offer different features and prices depending on what customers wanted.

For example, Allstate had learnt that while some consumers wanted their deductibles reduced for being safe drivers, others did not want to have an automatic rate rise if they were in an accident, and some wanted a “good driver” rebate.

Tell the world.

Mr Wilson believed that product innovation had to be supported by changes across the entire value chain.

This included changing Allstate’s advertising message. The new marketing communicated a value proposition other than price alone.

At the same time, new conversations were created for sales agents with customers. For example, they were given new price and features options to offer consumers, which were based on their specific economic circumstances as well as wants and needs. The result was a menu from which the agent could lead a conversation offering an Allstate auto insurance product. “Your Choice Auto” resulted from the effort to get closer to consumers, and the need for Allstate to be flexible in responding to them.

The economy has, of course, changed dramatically since the roll-out of the product five years ago. During the economic downturn, “Your Choice Auto” allowed customers to shift within the different tiers of the product and still maintain their relationship with Allstate.

Those who were price sensitive purchased the “Value” tier, while others seeking greater features continued to purchase the more premium offers.

Since its roll-out in 2005, Allstate’s “Your Choice Auto” has sold more than 4.5m policies.

Key lessons.

Innovation is often based on the simplest ideas and often this means learning from the example of other sectors and industries. For Allstate, this meant learning to redefine the relationship with customers to better understand what they wanted out of an insurance product.

Just as in other sectors, many consumers expect more features from providers and are willing to pay for them.

Leadership was also essential. Without the deep involvement of Mr Wilson, such strategic changes could not have happened. The insurance industry did not focus on consumer wants and needs.

The change reflects Mr Wilson’s consideration of segmented demand among consumers that is a multi-dimensional versus a one- dimensional look at the marketplace.

The writers are founder and CEO of The Cambridge Group, and chairman of the executive board and CEO of The Nielsen Company, respectively. They are co-authors of ‘How Companies Win: Profiting from Demand-Driven Business Models No Matter What Business You’re In’
- Financial Times, 20 Oct 2010