Acquisition Cost Allocation at Progressive Insurance

11 Pages Posted: 30 May 2017

See all articles by Phillip E. Pfeifer

Phillip E. Pfeifer

University of Virginia - Darden School of Business

Benjamin Potter

affiliation not provided to SSRN

Abstract

Omar Parvaiz, Progressive Insurance field product manager in charge of Tennessee and South Carolina, must analyze the results of a yearlong test of a new pricing algorithm he developed. The new algorithm allocated marketing costs to policies at a variable rate so the allocated marketing costs (and corresponding price in the cost-plus pricing system) increased with the other costs (primarily expected loss costs) associated with providing auto insurance to the policy holder. In contrast to the variable-cost allocation method was the traditional flat method in which each policy was assigned a fixed amount of marketing cost. The change to the variable-allocation scheme would make Progressive's pricing more competitive for higher-priced policies and less competitive for lower-priced policies. Tennessee was chosen as the experimental group, and other states in the region served as the control. Parvaiz must now figure out if the new pricing algorithm is better than the old one.

Excerpt

UVA-M-0785

Rev. Mar. 25, 2011

Acquisition Cost Allocation at Progressive Insurance

Omar Parvaiz sat at his desk, unsure how to proceed. As he pored over the test results, the reality of the situation struck him. Although he had a year's worth of data at his disposal, it was still unclear if his idea was a success. In one week's time, his recommendation to management would either expand or kill the program to which he had devoted considerable time and attention.

Over a year earlier, Parvaiz had begun to wonder how the allocation of acquisition costs affected his mix of businesses and thereby his profitability. As a field product manager (PM), Parvaiz was responsible for ensuring the profitable growth of the Progressive Corporation's consumer automotive insurance business in Tennessee and South Carolina. Therefore, he was constantly looking for opportunities to tailor Progressive's product offerings to his particular states and to improve pricing. At that time, he believed he had identified an opportunity with implications not only for his states but also for the whole of Progressive. One year later, with test results in hand, it was time to pass judgment.

Acquisition Spending in the Automotive Insurance Industry

. . .

Keywords: pricing, test markets, direct marketing, customer lifetime value

Suggested Citation

Pfeifer, Phillip E. and Potter, Benjamin, Acquisition Cost Allocation at Progressive Insurance. Darden Case No. UVA-M-0785, Available at SSRN: https://ssrn.com/abstract=2974675

Phillip E. Pfeifer (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4803 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/Pfeifer.htm

Benjamin Potter

affiliation not provided to SSRN

No Address Available

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