Bernstein's idea was simple. If he could get insurance companies to devise life-insurance polices with no commissions or very small ones, he could sell them while charging an up-front fee for his services. If he targeted wealthy individuals -- the ones he thought were overpaying in commissions -- he thought the combination of a cheaper policy with a fee would still be lower than an ordinary life-insurance policy.
That's where Bernstein's distribution problems came in. Obviously, he couldn't expect most insurance agents to get excited about the scheme. ("Great! You want to reduce my income on my most profitable clients! Where do I sign up?") On the other hand, if wealthy individuals wanted to buy more life insurance, they'd undoubtedly turn to their agents. So, at the age of 21, Bernstein didn't just have to sell his product but had to persuade clients to consider an alternative channel of distribution.
He decided to try a two-pronged attack. He could send direct mail to potential clients and then call on them. But he knew he needed credibility to persuade them to try something new, and insurance agents certainly weren't going to give it to him. So he started a campaign to explain his concept to other professionals to whom a wealthy person might go for advice about life insurance: namely, lawyers, accountants, and bankers in trust departments. He would ask them for a meeting to explain his concept, saying it was a new idea that their clients might soon ask about. Unfortunately, he discovered, lawyers, accountants, and bankers do not want to sell or recommend insurance.
The best Bernstein could do, then, was to convince the professional advisers that his was a legitimate alternative. So he started on a do-it-yourself public-relations campaign. Knowing that reporters saw their role as defending the public interest, he emphasized that consumers deserved to know about the costs they were paying in life-insurance commissions. When reporters balked at the notion of giving him what would amount to free advertising, he suggested that they not include his company's name but just mention the concept of "low-load" insurance.
Because Bernstein was among the pioneers in low-load insurance, he began to get press. First it was local, in Crain's Chicago Business, but eventually he was mentioned in Forbes, Fortune, and The Wall Street Journal, and by syndicated columnist Jane Bryant Quinn. Each time a story came out, Bernstein ordered reprints and sent them to the lawyers, bankers, and accountants he talked to. His aim was to solidify in their minds the notion that low-commission insurance was a credible alternative that was increasing in popularity. When Bernstein was trying to sell to new clients, he asked them who their lawyer, banker, and certified public accountant were -- and, ideally, he'd know at least one of them. If so, he would then suggest the client ask that adviser about Bernstein's concept. Your insurance agent, he'd say, will say we're awful, but your lawyer will know better. If Bernstein got a clean bill of health from an objective adviser, it was much easier to make a sale.
Bernstein built his credibility, and in 1985 he persuaded the accounting firm of Laventhol & Horwath to promote his service to its clients, primarily in the Chicago area, for a fee. Although Laventhol & Horwath recently went under, in those days its reputation was fine, and it gave Bernstein further standing within the professional community; it served as a badge of approval for his idea.
Since then Bernstein's concept has indeed become a trend of sorts; more than a dozen insurance firms have now entered the low-commission insurance market. Now Bernstein is thinking of expanding to wealthy regions such as Beverly Hills and West Palm Beach.
Like Bernstein, Armando Cuervo learned to rely on other professionals to help market his product. That was after a false start with traditional channels of distribution. Cuervo, through a federal research grant, had demonstrated that his invention, a device that simulates car motion and sound in a crib, stopped most colicky babies from crying. When he got baby stores to carry the product, he thought he was home free. But baby stores weren't interested in explaining the research to parents; the device was just one gadget among many they carried. Worse yet, Cuervo offered a money-back guarantee because he knew there were some babies for whom the device wouldn't work -- but stores hated being hassled by returns.
After a year of disappointing sales, Cuervo began targeting an audience that would understand and appreciate his scientific research: he started attending pediatric conventions and sending direct mail to pediatricians. The results were much better. Today his company, Sweet Dreems Inc., in Westerville, Ohio, sells its product, SleepTight Infant Soother, only by phone. Cuervo, who reports sales close to $350,000, says 50% of his referrals come from pediatricians.
Rather than inventing a distribution system or figuring out how to get into an existing one, Rick Chitty, CEO of Programmed Intelligence Corp., in Norcross, Ga., built his entire software company around the idea of getting somebody else to deal with the hassles of distribution. From the start, in 1986, Chitty and his partners decided that rather than spend a lot of money to get distribution, their company would license its report-writing software to other software developers that were writing for a variety of specialized industries. Their theory: whether the software was for accountants or pharmacists, the end-users would want a variety of options for printing out their data. It would be cheaper and easier for the software publishers to license Programmed Intelligence's software than to write their own.
Programmed Intelligence receives an up-front licensing fee as well as royalties. Chitty says his company now licenses its software to some 700 clients, who sell it under some 500 to 600 different names. Although licensing means giving up much of the profits, it's worth it to Chitty, who claims that his $8-million company has grown an average of 90% a year, with pretax margins in excess of 20%. "I'm interested in literally sitting in the background and clipping my little royalty coupons," he says.
