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Evidence from Pay-As-You-Drive auto insurance

Profiting from business model innovation: Evidence from Pay-As-You-Drive

Pay-as-You-Drive (PAYD), developed by Progressive Corporation, redefined and successfully enhanced its business model over the course of a decade. This insurance method, based on a family of business method patents in the United States, has given birth to a business model which gives power back to the consumer (by controlling customer value proposition), and also restructures the revenue model through lower premium levels and lower claims.

This new business model did not happen overnight. Indeed, high technology costs and policy-holders’ perceptions of privacy invasion were fierce challenges to implement the innovative business model. However Progressive’s achievements paid off, as drivers felt better educated via the PAYD portal, and achieved the right balance between perceived cost of privacy invasion and the benefits of greater control over driving behaviour and insurance costs. Overall, the PAYD insurance was seen more as an opportunity to grow the overall business rather than a threat to the conventional insurance business model.

In order to capture profit from this new business model, Progressive ensured that the value of business method patenting was boosted by investment in complementary assets, for example in marketing and sales. Utilising an event study methodology, we assessed contributions of PAYD insurance patents to Progressive’s market value. If we invested $100 in progressive’s stock on January 1, 1996, this investment would be worth $587 by 30 October 2010. Alternatively, if we invested $100 in the S&P 500 index, it would be worth $241, or $160 had the investment been made in the S&P 500 Insurance Index. Although Progressive has clearly outperformed both the market and the industry, only a fraction of this superior performance can be attributed to PAYD.

In summary, the analysis of the PAYD case allowed a thorough examination of how Progressive sought to capture value from its innovative business model. An integral part of a business model innovator’s competitive strategy should be the capacity to capture the resultant value.

Read the published research

Research the research article in: “Profiting from business model innovation: Evidence from Pay-As-You-Drive auto insurance” Research Policy. 42 (2013) 101-116.


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