For many businesses -- especially startups -- sales and marketing costs consume a sizable percentage of the operating budget. (Perfect example: Meal kit services like Blue Apron and HelloFresh.) That fact alone keeps many entrepreneurs on the sidelines, especially those without significant cash resources.

But what if you found a way to cut your customer acquisition costs to a fraction of what is typical for your industry? Imagine what that would do to your pricing models -- and more importantly, your ability to deliver a quality product or service to customers at a dramatically lower cost.

Would you start that business?

Kyle Nakatsuji would. Kyle is the founder and CEO of Clearcover, an auto insurance startup that combines a data-driven platform with a minimalist customer acquisition approach to offer drastically reduced premiums. Instead of running expensive brand awareness campaigns (Howdy, gecko), Clearcover will only market to potential customers during highly-targeted windows. (More on that in a moment.) 

But still: How did Kyle know it was time to pursue his dream? 

And how will you?

Let's find out.

The five biggest insurance companies in the U.S. spent around $3 billion on advertising last year, which of course got passed on to customers. 

I worked with the VC team at American Family Insurance and over time came to a realization that, in hindsight, is pretty obvious: Insurance is boring. Most people would prefer to think about it less, not more.

Despite that, almost every insurance company I talked to was spending an incredible amount of time and money trying to get people to think about their insurance company more often. Advertising, endorsements, phone apps... they wanted to be a bigger part of everyone's life.

If the customer's natural state is disengagement, it's expensive to try to get them to engage. Of course the insurance company isn't going to eat those costs, so they get passed on to the customer. 

Identifying the problem is one thing, finding a solution is another.

Absolutely. So when we looked at the model, we got excited about the idea of what we call "incidental insurance": Using tech to seamlessly integrate insurance within a handful of moments when it's naturally necessary people to think about insurance.

Aside from those moments, we'll leave them alone.

And of course leaving people alone much of the time means spending less money on advertising, which means we can keep our prices lower.

Moments such as...?

We picked a few moments to focus on. One is when you're already shopping for insurance. The second is when you're buying a car. And the third bucket is in personal financial management -- because we save people money, a service like Mint is a good place to say, "If you want to save money on your bills, here's a great way..."

So we built a tech platform to integrate insurance in those moments. And of course we built an insurance company from the ground up, one that offers other efficiencies. We put those two things together and built a car insurance product that is extremely straightforward. It's the kind of insurance you expect to buy... but we can charge less because we will pay less to buy attention and acquire customers.

It sounds great, but surely there are challenges. 

Having a contrarian viewpoint seems sexy and is definitely in vogue, but holding that contrarian viewpoint every day and sticking to it in the face of people who think you're crazy is pretty hard. Staying true to what we believe is important is hard. People say, "You're nuts for selling personal auto insurance... you're nuts for thinking you can compete with Geico and State Farm...." 

CEOs really only have 3 jobs: 1) Hire great people, 2) Don't run out of money, and 3) Have a north star and make sure people can always see it.

That's where staying strong in the face of doubt in your model is hard. It's easy to lose sight of it when people say it's not possible. 

So how did you get to the point where you stopped thinking about it and said, "I'm going to do this"?

I was a venture investor in this particular space, so I had the benefit of a number of things going in. For one thing, I had a lot of time to think about what was important in the market. As investors we were thesis-driven, so I had time blocked out to think about the future of the category.

Then, as a venture investor your job is to sit with the smartest people you've ever met and have them tell you the smartest idea they've ever had.

That's a pretty cool gig.

(Laughs.) That meant we got to hear all these interesting perspectives. Do that for very long and you get build this latticework of ideas... and you also get to see where there are gaps.

The combination of having time to think and seeing where people were missing the mark gave me a vantage point to determine where we could make an impact.

Then it became the classic unsolved problem... but how do you get to where you think you're the one who should solve it? I know it sounds like a cliche, but for me, I got to the point where I was more fearful of the regret of not trying than it was of trying.

As soon as I reached that point, the decision was made.

I've heard other entrepreneurs say the same thing. 

I was asking entrepreneur friends of mine how I would know. They all gave me a similar answer.

They said, "You're just going to know."

I said, "Come on. You have to give me more than that." (Laughs.)

And then one day I realized I was no longer afraid to try -- I was afraid not to try. 

And they were right. I just knew.

Once you're "in," then you have to make it work. So how will you engage customers when you're not spending millions on advertising, and a network of agents...?

One way is to work with partners. If you're a partner and you have a customer that needs car insurance, how do we make that an integrated part of the experience that fits what the customer is looking for... but also fits your objective as a business -- and meets regulatory requirements?

Sometimes seamless integration just means a much better referral process. We built a flow API, with technology that looks at all the data that exists around the customer, whether from partners, third parties, our own database... then we dynamically create an application flow for each user based on what we already know.

Again, people don't like to think about insurance, so we try not to ask questions you don't need to be asked. We'll deploy that system across all of our partners, and let the system react in the background to generate unique flows for each user.

So maybe a customer is using TrueCar to find the vehicle they want to buy. The customer will select the car... but TrueCar has to make sure it's insured, so we solve that problem by making sure the customer not only has insurance at their fingertips, but will also save a bunch of money.  

Our goal is to find places within preexisting experience where it matters to the customer.

A huge hurdle you'll have to overcome is awareness. Big insurance companies spend a ton of money trying to make people feel they're the best option. 

Among all of our challenges, that's one of the greatest challenges our business faces. There's a huge gap between the kind of investment you make in "buying" trust versus less expensive means, like honesty transparency.  

We spent a lot of time on contextual frameworks. Deep down customers know that insurance is basically the same wherever they buy it. But what they don't know is that the companies that spend the most time convincing you that they are "better" are the ones who are charging you for it. 

So yes, what keeps me awake is that no one has ever heard of us.... and sometimes having the lowest price isn't useful unless you convince people there's a reason for it.

On the flip side, it's a huge market... and if you do your job right, awareness will spread organically.

We look at it this way. Auto insurance is a compulsory product. Around 210 million licensed drivers are arguably in the market for insurance every six months.

The government tells people they have to buy it, and we have lower prices than just about everyone else in a lot of circumstances.

Knowing we have a product people have to buy, and that we're offering it at the lowest price people can find... that's what helps me sleep at night.

That, and the fact we built an AI-based recommendation engine that gives you confidence that you're selecting the right coverages. You can make a smart decision... but you don't have to drive to someone's office to make it. And you don't have to pay too much for it.

We believe that in any service-oriented business the idea of agency, of helping people make smart, independent choices is important.  

For too long in our business, people have assumed that an agent is the only way to provide agency -- and that is definitely not the case.

And for customers, it definitely doesn't have to be that expensive.

 

Published on: Oct 25, 2017