Tag Archives: commodity

Unfair Perception of Insurance

The definition of a commodity, per Investopedia is:

“The basic idea is that there is little differentiation between a commodity coming from one producer and the same commodity from another producer. A barrel of oil is basically the same product, regardless of the producer. By contrast, for electronics merchandise, the quality and features of a given product may be completely different depending on the producer. Some traditional examples of commodities include grains, gold, beef, oil and natural gas. More recently, the definition has expanded to include financial products, such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace. For example, cell phone minutes and bandwidth.”

West Texas oil of x grade is West Texas oil of x grade. It does not matter what hole in the ground it comes from. The market values it the same. Red Russian wheat is Red Russian wheat. It does not matter what farmer grew it. The market values it the same. When the market values something the same, regardless of who grows it, drills it, makes it or services it, that “something” is a commodity. Sometimes the product is truly indistinguishable, such as the oil and wheat examples.

Sometimes. though, differences exist, but the buyer does not recognize the differences and therefore treats something as a commodity that really is not. The seller knows, or should know, the difference. The seller can then take advantage of the buyer by selling a product/service of less quality than the buyer imagines at the commodity price. Or, the seller will sell a higher-quality product at the commodity price and lose money or at least waste money because no one is paying for the extra quality because the buyer does not realize the higher quality exists.

In these situations, a perceived commodity exists, not a real commodity. The difference is important. Insurance is a perceived commodity, not typically a real commodity (a few exceptions exist). As a result, quite often, people buy lower-quality insurance policies because they think all policies are commodities, so why spend any extra? If they were correct, then their logic would be right. However, they are getting taken advantage of because they are comparing a lower-quality product at a lower price with a higher-quality product at a higher price and not seeing the difference in quality. Where they get suckered a second time is the seller of the lower-quality product prices the policy higher than actually necessary but materially less than the higher-quality policy. The insured thinks he is getting a good deal when he is not, the higher-quality provider loses a sale and the lower-priced seller makes extraordinary profits.

See also: Insurance Is NOT a Commodity!  

Any reader thinking this is not happening clearly does not live in the real sales world. An entire economic analysis of this circumstance was described in detail in 1980 by an economist named Dr. Shapiro, and we’re seeing it played out before our eyes every day. The only winners are the entities selling low quality.

The reasons insurance is a perceived commodity rather than a real commodity are:

  • Insurance is complex. All one has to do is read a policy to understand that it is complex. Then add the elements of service and claims, and how no one publishes quality claims data relative to which carriers provide the best claims service, and one understands why consumers’ eyes glaze over.
  • Most consumers do not want to buy insurance, even if it was simple, so asking them to invest time and energy into determining which product is quality by learning something so complex as insurance when they do not even want to buy it is asking for far too much.
  • Let’s be honest, most producers and customer service represenatives (CSRs) do not truly understand many insurance coverages, either. I have been teaching coverages, auditing agencies for E&O, answering email questions from agencies regarding coverages and so forth for 30 years. I am amazed at how little quite a few producers and CSRs do know.

If sellers cannot explain insurance, they default to selling insurance as a commodity. Typically we refer to this as “selling price,” but it is really defaulting to selling insurance as a commodity because the only differentiation with a real commodity is price. Such actions reinforce to the public that insurance is a commodity. At the very least, producers should selfishly avoid selling insurance as a commodity because, bluntly, insurance companies and the public do not need to pay 15% commission to sell a commodity. To sell price is to tell the market you are worthless.

The industry now has new players, insurtech or disrupters as they’ve become known. Many have no insurance background and therefore no pretense they know anything about insurance. They do not pretend that insurance is special. They see insurance as a commodity. Many industry veterans cannot stand the thought of obvious “know-nothings” selling insurance, but at least when they admit they know nothing I admire them for being honest. Quite a few people in the industry who have decades of experience do not know much either but will not admit it. These particular new players are simply making ignorance transparent.

When ignorance is transparent, price also becomes more transparent, and this is what the public, who sees insurance as a commodity, wants. They want transparency. If they see insurance as a commodity, they certainly do not want pricing obscured by an agent, who pretends to know something, when he does not, making an extra 15%, which means the public may pay an extra 15% that is truly a waste. Truly, the industry should not be upset if the result is to eliminate the waste incurred spending 15% on agents who are incompetent.

The catch, as Dr. Shapiro described back in 1980, is what happens to the producer who truly knows what she is doing, brings true value to the consumer and is worth 15%? What happens to the insurance company who truly has far better coverages or far better claims service? These entities bring important value to all of society, and they are being squeezed. Here are some of my suggestions:

  • Actually know coverages. Actually learn business income. Actually learn ordinance and law. Actually learn at least what questions to ask around cyber. Actually even learn the differences in homeowners policies.
  • Then learn how to discuss coverages with clients. Knowing coverages and knowing how to communicate coverages are two different things. This is work and a craft. Learn your craft well.
  • Hire a marketing firm/publicity firm to explain for you your knowledge and ability to communicate.
  • Package the insurance policy with services. Insurance policies in and of themselves do not deign a premium of 15% commission any more. The 15% is for the package of services the agency provides, the experience the agency creates at sales, renewal and claim.

See also: Insurance is Not a Commodity? Hmmm  

I work with a handful of clients that have truly built their culture around these features and others. They do not have the problem of selling commodity insurance that most agencies have, and their organic growth rates prove it. Study after study has shown that, regardless of the industry, building expertise, communication skills and a consumer experience around the sale is absolutely the only way to counter, even thrive, in a world where consumers perceive a product to be a commodity when, in reality, it is not.

6 Worst Things to Happen to Insurance

On Dec. 31, I will close out nearly three decades with the Big “I” at both the state and national levels, which followed a 19-year career with ISO and its predecessors.

To paraphrase the Farmers commercial, I know a thing or two because I’ve seen a thing or two over nearly 50 years. I’m so old I can remember when there were underwriting cycles and when investment income was as critical in driving those cycles as underwriting results.

When I started to look back over a long career, I was initially inclined to write about all the great things I’ve experienced—there have been many. But I decided to take an approach that I hope won’t be perceived as negative.

The good things don’t need fixing. So rather than focus on the best of 47 years, I’d like to address six issues I think are bad for the industry that have evolved at an accelerated rate in recent years. Here’s my roundup of the six worst things that have happened to the insurance industry in the last 47 years.

See also: How to Reimagine Insurance With IoT  

The ‘insurance is a commodity’ myth. Anyone who pays attention to TV’s incessant insurance advertising knows the focus of the most prevalent ads is almost exclusively price. The public has been duped into believing that there is no real difference between insurance policies or insurers, and that the agent serves no useful purpose except to cost you an extra 15%.

At some point, even with the miracle of today’s technology in the form of automation, data analytics and more, insurers will be operating about as efficiently as they possibly can. If competition still focuses on price alone, how can insurers continue to compete? Considering two-thirds or more of the premium dollar goes to  losses and loss adjustment expenses, you have to reduce that expense. The easiest way to do that is reducing what the policy covers.

The vanishing premise that the purpose of insurance is to insure. Perhaps due in large part to price-based competition, after the coverage broadening that began in the 1970s, insurance policies are increasingly stripped down to the point of sometimes becoming illusory.

In various seminars and webinars, I recount a story about my experience with a tree removal service whose excess and surplus commercial general liability policy excluded both in-progress and completed operations. While this trend is particularly apparent in personal lines and the E&S marketplace, it is spreading to standard markets, as well.

The problem is exacerbated by regulators who no longer review insurer form filings for coverage reductions, focusing their resources almost exclusively on keeping prices low—even if the reason they’re low is lack of coverage that endangers the public. Is it time for minimum coverage specs, just as we have minimum auto liability limits?

The obsession with data vs. people. Among underwriters and actuaries, today’s buzzwords are “data analytics” and “predictive modeling.” There is nothing inherently wrong with either—as long as they’re used properly as a tool.

My son is a data scientist in another industry, and the potential applications of the data many organizations collect are remarkable. But for us, it’s just an evolution from the pure actuarial analysis the industry has practiced for many decades. The industry can’t exist without the ability to predict losses.

The movement today, though, is not about predictability in the aggregate, but whether an individual risk or very small subgroup of insureds is likely to have a loss. At issue here is the accuracy and relevancy of these models, as well as their impact on affordability and availability for those individual risks that the algorithms say don’t measure up.

As Ben Franklin said, “All things in moderation.” Self-serving firms selling analytical services use the media to tout analytics as the be-all, end-all solution for all that ails the industry.

Consider this anecdote: Several decades ago, an agent negligently failed to insure a barn that subsequently suffered a total fire loss. The branch manager of the insurer contacted the four other branch managers of farm insurers the agent represented. They each agreed to pay one-fifth of the loss “so their agent wouldn’t be embarrassed in his small community.” How likely is this to occur today?

Industry disrupters and the resurrection of the “death of the insurance agent” prediction. Insurance industry media is loaded with stories about tech disrupters that are going to revolutionize the industry and put insurance agents out of business. Been there, done that.

How these startups are getting millions from venture capitalists is puzzling when you consider some of their business premises, including a recent one involving “micro-insurance.” The premise here is that a consumer purchases a policy with a phone app that only covers a particular item—snow skis, for example—and only while they’re in use. How can insurers possibly price such a risk affordably, and who wants 40 separate micro-policies?

The reality is that the foundation of the industry rests on an often complex legal contract. It’s not like buying a pair of socks or K-cups on the internet. Not every transaction can be reduced to a smart phone app or Amazon-like “one-click” purchase, nor should it.

The certificate of insurance frenzy and the “additional insured” illusion. Everybody wants to be covered by everybody else’s insurance. There’s nothing wrong with requiring business partners to carry insurance; it’s a good thing, because with the exception of auto financial responsibility laws and loan requirements, there’s not much pressure to ensure that individuals and businesses carry insurance to protect the public.

But I’m convinced that this situation has gotten out of control. Companies are spending billions of dollars on control and monitoring, while the actual coverages they provide are becoming increasingly illusory. What is gained here? And what are the ethics behind a large firm effectively forcing smaller businesses to cover them under the little guy’s policy, even if the big guy is 99% at fault?

The dumbing down of the industry. From agents to underwriters to adjusters, far too many industry professionals do not read the policy forms they sell and service. Many others review them at some point, but fail to understand what they’re looking at. Still others read them and think they understand them, but can’t apply them to real-life loss situations.

The problem is compounded by the increasingly rapid societal changes and exposures we witness daily. Insurance executives—including the people involved in the latest wave of industry “disrupters”—appear to lack both a historical perspective of the industry and a fundamental understanding that the overriding purpose of the industry is to protect individuals, families and organizations from financial ruin.

See also: Why Are Insurance Websites So Bad?  

The insurance knowledge gap is growing, as is the apparent disdain for quality insurance and risk management education. I think mandatory, bean-counting continuing education programs carry some of the blame—by and large, they’ve almost completely failed to accomplish what they set out to accomplish.

Despite the negative tone of this article, we work in a great and indispensable industry. Civilization and commerce as we know it couldn’t exist without insurance—but there’s always room for improvement.

I have no career regrets. It has been a great ride and a privilege serving all of you over the years. In closing, I’d like to point out that I’m not disappearing from the industry—just moving to a new chapter in my twilight years. I will be unveiling a website next month, where I will be blogging about these and other industry issues for (I hope) many years to come. I hope to see you there.

Insurance Is NOT a Commodity!

Insurance technology was once the red-headed stepchild of financial technology. But with more than 800 insurtech startups garnering almost 150 deals totaling $3.5 billion of investment since 2015, insurtech is a force to be reckoned with.

With this infusion of new blood have come some interesting and provocative pronouncements about this great industry. Some have come from people who are smart, insightful and engaged, while others are just plain arrogant, full of hubris, with their feet firmly planted in the air. Some of these observations have been eye-opening and challenging, others benign, some uninformed, some just plain dead wrong.

Of all the things said, one is downright wrong. This pronouncement of misinformation is that insurance is a commodity, that all insurance policies are the same, that there is no real difference between policies issued from different companies.

What is a commodity?

The best definition of a commodity that I can find reads: a product or service that is indistinguishable from ones manufactured or provided by competing companies and that therefore sells primarily on the basis of price rather than quality or style.

The key word in that definition is “indistinguishable.” The products or services when put side by side act the same, delivering the same results.

A perfect example is a battery. When I need a AA battery, I go to the store and buy one. Now it does not matter what store I go to or what brand I buy. As long as it was labeled AA, I knew that it would both fit and work by delivering just the right amount of electricity (provided I put it in the right way, but we’ll save that story for another time).

See also: Has Auto Insurance Become a Commodity?  

Another example is gasoline for our cars. It really does not matter which gas station I go to, or which grade I select; the gas goes into the gas tank, and the car runs. Yes, we can debate the benefits of different additives and octane grades: regular (usually 87 octane), mid-grade (usually 89 octane), and premium (usually 92 or 93) and their impact on engine knock. But the simple truth is that I put any gas into my car and it runs.

In one sense, I understand that insurance can be thought of as a commodity. Go to a website, enter a handful of fields, and multiple quotes are presented for you to choose from. In this narrow and limited perspective, insurance can look like a commodity on the front side of the transaction.

But the real question is not if a handful of fields can get you a number of quotes, but if those policies are the same? Do they cover the same things? Will claims be paid at the same amount? If insurance truly is a commodity, policies will all pretty much look the same, covering the same things.

A Personal Example

I was in Las Vegas for InsureTech Connect when Hurricane Matthew came up the Florida coast. I got a text message from the airline that my return flight to Orlando was canceled, and I would be contacted about rebooking. Quickly looking at the Orlando airport website, I read that it was going to be closed starting Thursday noon and at least all day Friday. Once Matthew passed, airport personnel would assess the damage and then determine when to reopen and at what capacity.

I was now in full scramble mode, calling the hotel to extend my stay. The agents was very empathetic and most willing to help. This made me feel somewhat relieved until the agent cheerfully informed me that I certainly could extend my stay another night for $780! I almost said, “Is that with or without dancing girls?” But remembering that I was in Las Vegas, I found myself wondering if that might be an actual option. Holding my tongue, I thought best not to say anything other than to thank the agent for the kind offer.

Yes, I was able to find another hotel room that was less expensive. Hurricane Matthew passed without doing much damage in the Orlando area. The airport reopened on Saturday, and I was able to get home without much trouble.

The reason for telling you this story is to use it as a backdrop to see if insurance is a commodity, using perhaps the simplest form of insurance: trip insurance.

Go to a trip insurance website, enter four pieces of information, get a bunch of quotes, select one and pay for it via credit card. Very simple, very straightforward. Trip insurance certainly walks and talks like a commodity.

The question is, when did my trip insurance start? What was covered? What compensation was I due? How much could I expect? This is where our journey really begins.

Trip insurance will run you on average between 4% and 9% of the trip cost. But a survey of 10 different trip insurance policies found that the terms and payments were very different. Also, the most expensive policy did not have either the lowest deductibles or the highest benefits. As a matter of fact, one carrier that was priced around 5% of the trip cost had many of the highest benefits. Here are some details of the different policies.

 

Screen Shot 2016-11-27 at 11.07.23 AM

As you can clearly see, the coverages differ significantly in both their cost and potential benefit. Let’s walk through Delay Compensation as an example. One policy costs 4% of the trip and pays as much as $500 for a delay of 12 hours or more (not even covering the cost of my hotel room)/ Another policy costs 5% of the trip yet pays as much as $2,000 for a delay of five hours or more. The most expensive policy costs 9% of the trip but only pays as much as $1,000.

Pricing, coverage and benefits are not just mildly different, they are wildly different based on product differentiation and competition. This example is based on a simple trip insurance model. When it comes to healthcare choices, “Comparing plan premiums and deductibles only scratches the surface of what you should evaluate before selecting a plan this fall. Policy details can make an important difference in coverage and costs, but it may take some digging to uncover them.”

This caution also applies to personal insurance sold directly to the public. I’m familiar with one person who selected a personal auto carrier because it was the low-cost policy. However, when he had an accident, he discovered that the policy had no collision coverage. The few dollars he saved on the premium were insignificant compared with the $3,800 repair he had to pay for.

See also: A Brave New World: Move Away From the Commodity Trap  

Differences in coverage and payment, inclusions and exclusions across different types of insurance are as numerous as options on a Rubik’s Cube.

There are a number of other ways that insurance is not a commodity.

  • Users – a commodity does not care who is using it; it just works. The fuel in your car does not care who is behind the wheel or in passenger seats. Insurance, however, does care who is using it. With insurance, depending on circumstances and policy wording, not all drivers of your car are covered by your personal auto policy.
  • Ownership – a commodity does not care who owns it; it works. With insurance, a vehicle may be owned by a company with a commercial auto policy, but that does not guarantee that the vehicle is covered.
  • Termination – a commodity works until it stops; the battery runs out of energy, the car runs out of fuel. That’s it. Insurance, however, is still in effect beyond its expiration date. Florida victims of Hurricane Matthew have five years to file a claim.
  • Location – a commodity behaves the same regardless of where it is used. Put a battery into a device, and it provides energy no matter where you go. With insurance, the location matters greatly. While most states have either two or three years to report a real estate property claim, the timeframe varies wildly from a low of one year to a high of 10 years depending on the state. Also, when you drive your car into Mexico, the gas still works, but your auto insurance stops at the border.
  • Consistency – a commodity does what it does; its specifications or requirements do not change over time. A battery is designed to deliver so much power over time based on its design. Batteries can lose their charge, and gas can degrade, but their basic function does not change. The same cannot be said about insurance, even if it is written into policy wording or legislative edict. Two recent court cases have dramatically changed the cost and coverage of workers’ compensation policies in Florida. The first removed limits on how many billable hours and cost can be accumulated by claimant attorneys. The second changed the duration that temporary total disability claims are to be paid, from two years to five years. Both these decisions were made long after the policies they affect were sold.
  • Cost – when a commodity is produced, its costs are known. You know all the parts of the battery, you source them, assemble the battery, distribute and sell them. The same can be said for gas. With a commodity, costs cannot suddenly go up for products already sold. But when you price and sell an insurance policy, you cannot predict all the costs or even what is to be paid and for how long. Think about the two Florida workers’ compensation examples above; policies were priced and sold based on “known” limitations on both claimant attorney fees and temporary total disability payments. Insurance companies will now pay unanticipated claim costs above and beyond what was originally covered, even though they were not factored into the original pricing. And there is no way to go back to the customer and charge extra for the added claim costs that are above and beyond the original policy.
  • Importance – if a battery fails, you throw it out and get another one. If fuel is old or contaminated, your car may sputter for a while, but that’s it. However, insurance is oh so much more important. Insurance gives stability to our financial markets. Insurance encourages entrepreneurial investment and risk taking. Insurance helps people rebuild their lives when tragedy happens.

Insurance is vitally important to our economy. Virtually no commerce is conducted without it. Insurance is also wildly complex, varying from state to state, company to company, policy to policy. It requires attention to detail, rigorous and serious thought.

For additional information on this topic, follow the links below;

The Future of Telematics Is… Italy

The black box used for telematics makes it possible for insurers to enrich their auto insurance value proposition by adding services built upon data. These services represent a way of de-commoditizing the car insurance policy and are also a source of income. In the medium/long term, such services will become more and more important as the risks covered by car insurance decrease because of technological progress on security and connected cars. These services also increase the number of interactions with the client, creating a richer connection and improving customer satisfaction. This is true both for Italy and at an international level.

There are three macro categories when it comes to services:

  1. Informational services related to the UBI (usage-based insurance) policy, typically delivered through a smartphone app or a dedicated area on a website. These services concern: quantification of pricing adjustment at the moment of the contract renewal based on previous driving behavior; coaching and advice regarding the style of driving; advice on how to save more while behind the wheel; “gamification” that allows a comparison of one’s own driving style with that of friends. A Canada-based company called Intact and Discovery, which is based in South Africa, can be considered among the most advanced examples that currently use this type of approach. According to recent data made available by a telematics service provider, four out of five clients owning a telematics insurance policy check put their driver score at least once a month. Furthermore, there is evidence that remote coaching programs can lead to concrete results in modifying driving behavior.
  2. Product offers related to the client’s automobile — like Discovery has done in South Africa with the Tires or like Allstate Rewards — or insurance policies sold “on the go” using data collected from the boxes installed on cars (a process known as reverse geocoding). Tokio Marine (Japan-based) and telephone operator NTT Docomo have shown that impulse “cross-selling” of low-value insurance coverage is a valid approach.
  3. Services related to the customer journey in a connected car.

There is a vast array of services that can be developed within the connected car ecosystem, and the technology is moving fast. There are start-ups and innovative business models popping up everywhere around the world. To cite just a recent Italian example, there is WoW — a digital wallet created by CheBanca! — which has integrated a parking payment service called Smarticket.it.

Services could be observed on three stages of the customer journey:

  • While behind the wheel. Services include bad weather alert, speeding alert, dedicated concierge and even an alert that is activated if the car leaves a pre-defined “safe area” (family “control” options for young or old members of the family). Discovery‘s approach in this field is highly relevant and includes an anti-theft service that signals to the client if the driver has a different driving style compared with the usual one;
  • In case of an incident. Here the Italian market is considered to be an international best practice because of how it has perfected the usage of telematics data to manage services. Many companies here have invested in creating a valuable customer experience by involving partners specialized in assistance. The solutions provided in case of an incident start with contacting the client and — depending on the gravity of the event — continue with sending help directly and taking care of all the logistic and case management problems that can arise. Innovation is now focusing more on simplifying the FNOL (first notice of loss) procedure. One such example is Ania, Italian Association of Insurers, which has announced for 2016 the launch of an app for FNOL.
  • While the car is parked. Beyond locating and recovering the car in case of theft, the blackbox can send alerts when the vehicle is moved or damaged in any way. This also allows a driver to locate a parked vehicle. There are three Italian companies – TUA, Cattolica and Cargeas – that have recently launched innovative value propositions for parked cars. One of the best practices is the street sweeping alert by Metromile.

In this new service ecosystem, insurers will find themselves forced to co-compete (that is collaborate and compete) with different actors that are active in the connected car sector.

Italy is at the moment one of the most advanced countries in terms of service development connected to telematics; they have become mainstream, not just a niche. At the end of 2014, telematics represented 15% of motor insurance sales and renewals in Italy, reaching 30% in some regions, as underlined by a recent analysis by IVASS.

This creates the perfect conditions for the consolidation of approaches driven by insurance companies.

How to Avoid Commoditization

How can a company liberate itself from the death spiral of product commoditization?

Competing on price is generally a losing proposition—and an exhausting way to run a business. But when a market matures and customers start focusing on price, what’s a business to do?

The answer, as counterintuitive as it may seem, is to deliver a better customer experience.

It’s a proposition some executives reject outright. After all, a better customer experience costs more to deliver, right? How on earth could that be a beneficial strategy for a company that’s facing commoditization pressures?

Go From Commodity to Necessity

There are two ways that a great customer experience can improve price competitiveness, and the first involves simply removing yourself from the price comparison arena.

Consider those companies that have flourished selling products or services that were previously thought to be commodities: Starbucks and coffee, Nike and sneakers, Apple and laptops. They all broke free from the commodity quicksand by creating an experience their target market was willing to pay more for.

They achieved that, in part, by grounding their customer experience in a purpose-driven brand that resonated with their target market.

Nike, for example, didn’t purport to just sell sneakers; it aimed to bring “inspiration and innovation to every athlete in the world.” Starbucks didn’t focus on selling coffee; it sought to create a comfortable “third place” (between work and home) where people could relax and decompress. Apple’s fixation was never on the technology but rather on the design of a simple, effortless user experience.

But these companies also walk the talk by engineering customer experiences that credibly reinforce their brand promise (for example, the carefully curated sights, sounds and aromas in a Starbucks coffee shop or the seamless integration across Apple devices).

The result is that these companies create something of considerable value to their customers. Something that ceases to be a commodity and instead becomes a necessity. Something that people are simply willing to pay more for.

That makes their offerings more price competitive—but not because they’re matching lower-priced competitors. Rather, despite the higher price point, people view these firms as delivering good value, in light of the rational and emotional satisfaction they derive from the companies’ products.

The lesson: Hook customers with both the mind and the heart, and price commoditization quickly can become a thing of the past.

Gain Greater Pricing Latitude

Creating a highly appealing brand experience certainly can help remove a company from the morass of price-based competition. But the reality is that price does matter. While people may pay more for a great customer experience, there are limits to how much more.

And so, even for those companies that succeed in differentiating their customer experience, it remains important to create a competitive cost structure that affords some flexibility in pricing without crimping margins.

At first blush, these might seem like contradictory goals: a better customer experience and a more competitive cost structure. But the surprising truth is that these two business objectives are actually quite compatible.

A great customer experience can actually cost less to deliver, thanks to a fundamental principle that many businesses fail to appreciate: Broken or even just unfulfilling customer experiences inevitably create more work and expense for an organization.

That’s because subpar customer interactions often trigger additional customer contacts that are simply unnecessary. Some examples:

  • An individual receives an explanation of benefits (EOB) from his health insurer for a recent medical procedure. The EOB is difficult to read, let alone interpret. What does the insured do? He calls the insurance company for clarification.
  • A cable TV subscriber purchases an add-on service, but the sales representative fails to fully explain the associated charges. When the subscriber’s next cable bill arrives, she’s unpleasantly surprised and believes an error has been made. She calls the cable company to complain.
  • A mutual fund investor requests a change to his account. The service representative helping him fails to set expectations for a return call. Two days later, having not heard from anyone, what does the investor do? He calls the mutual fund company to follow up on the request.
  • A student researching a computer laptop purchase on the manufacturer’s website can’t understand the difference between two closely related models. To be sure that he orders the right one for his needs, what does he do? He calls the manufacturer.
  • An insurance policyholder receives a contractual amendment to her policy that fails to clearly explain, in plain English, the rationale for the change and its impact on her coverage. What does the insured do? She calls her insurance agent for assistance.

In all of these examples, less-than-ideal customer experiences generate additional calls to centralized service centers or field sales representatives. But the tragedy is that a better experience upstream would eliminate the need for many of these customer contacts.

Every incoming call, email, tweet or letter drives real expense—in service, training and other support resources. Plus, because many of these contacts come from frustrated customers, they often involve escalated case handling and complex problem resolution, which, by embroiling senior staff, managers and executives in the mess, drive the associated expense up considerably.

Studies suggest that at most companies, as many as a third of all customer contacts are unnecessary—generated only because the customer had a failed or unfulfilling prior interaction (with a sales rep, a call center, an account statement, etc.).

In organizations with large customer bases, this easily can translate into hundreds of thousands of expense-inducing (but totally avoidable) transactions.

By inflating a company’s operating expenses, these unnecessary customer contacts make it more difficult to price aggressively without compromising margins.

If, however, you deliver a customer experience that preempts such contacts, you help control (if not reduce) operating expenses, thereby providing greater latitude to achieve competitive pricing.

Putting the Strategy to Work

If your product category is devolving into a commodity (a prospect that doesn’t require much imagination on the part of insurance executives), break from the pack and increase your pricing leverage with these two tactics:

  • Pinpoint what’s really valuable to your customers.

Starbucks tapped into consumers’ desire for a “third place” between home and work—a place for conversation and a sense of community. By shaping the customer experience accordingly (and recognizing that the business was much more than just a purveyor of coffee), Starbucks set itself apart in a crowded, commoditized market.

Insurers should similarly think carefully about what really matters to their clientele and then engineer a product and service experience that capitalizes on those insights. Commercial policyholders, for example, care a lot more about growing their business than insuring it. Help them on both counts, and they’ll be a lot less likely to treat you as a commodity supplier.

  • Figure out why customers contact you.

Apple has long had a skill for understanding how new technologies can frustrate rather than delight customers. The company used that insight to create elegantly designed devices that are intuitive and effortless to use. (Or, to invoke the oft-repeated mantra of Apple co-founder Steve Jobs, “It just works.”)

Make your customer experience just as effortless by drilling into the top 10 reasons customers contact you in the first place. Whether your company handles a thousand customer interactions a year or millions, don’t assume they’re all “sensible” interactions. You’ll likely find some subset that are triggered by customer confusion, ambiguity or annoyance—and could be preempted with upstream experience improvements, such as simpler coverage options, plain language policy documents or proactive claim status notifications.

By eliminating just a portion of these unnecessary, avoidable interactions, you’ll not only make customers happier, you’ll make your whole operation more efficient. That, in turn, means a more competitive cost structure that can support more competitive pricing.

Whether it’s coffee, sneakers, laptops or insurance, every product category eventually matures, and the ugly march toward commoditization begins. In these situations, the smartest companies recognize that the key is not to compete on price but on value.

They focus on continuously refining their brand experience—revealing and addressing unmet customer needs, identifying and preempting unnecessary customer contacts.

As a result, they enjoy reduced price sensitivity among their customers, coupled with a more competitive cost structure. And that’s the perfect recipe for success in a crowded, commoditized market.

This article first appeared on carriermanagement.com.