17 August 2009

Statistics are like a bikini.  What they reveal is suggestive, but what they conceal is vital.

-Aaron Levenstein

Statistics are an incredibly useful decision making tool if you can understand their scope and limitations. However, too often statistics are used to tell half truths, particularly when someone’s trying to sell you something.  A little while ago Allstate came out with a commercial saying that “people who switched to Allstate  saved an average of $400 per year.”

At first glance, this statistic seems quite compelling. How can Geico call itself the low cost option if people are switching to Allstate and saving hundreds of dollars? Perhaps I should check out Allstate.

First, it is important to understand the nature of the insurance industry. There are so many different products and product lines, there is no way for any company to be the cheapest in everything at all times. There will always be some product line, whether it’s renters insurance in Montana or collision insurance for yachts between $15 and $20 million, where one company is cheaper than another. This allows the Allstate ad to be deceptive in a number of ways.

It seems obvious to me that people who switched to Allstate saved money, because if people looked and Allstate cost more, they generally wouldn’t switch. Therefore, we’re only seeing a subset of people who looked, saw Allstate was less expensive, and decided to switch.  What we don’t know is how many people who checked the prices, saw it was more, and decided to stay with their current provider. Perhaps Allstate is cheaper in Montana, and all its new customers came from Montana. Allstate could have gotten 150 Geico customers, and Geico could have gotten 10,000 Allstate customers, and who would know?

Next, we’re unsure of the distribution of savings. Is that $400 what most customers can expect to save, or is it skewed by some multinational corporation that switched and saved a million dollars.

It’s also interesting to frame the statistic another way: It takes $400 in savings to convince someone to switch to Allstate. If Allstate really was a higher quality product, wouldn’t the statistics show that people are willing to pay more?

I really don’t have much against Allstate, it just bothers me when a company tries to trick me with statistics…