- Andrew Glaser
This Lemonade needs more Sugar: Applying Jobs To be Done Theory to Investing
Jobs to be Done (“Jobs”) is becoming known as an essential innovation framework but could it also be an equally powerful tool for investors? As a Jobs practitioner and former hedge fund Portfolio Manager, I sit in a unique position of having deep expertise in both areas. Simply put, Jobs is a tool that would confer a massive advantage to venture capitalists and hedge fund managers alike if it were applied systematically.
Jobs allows investors to bypass the logical arguments of CEOs, and the ones they self-construct and understand consumer causality. A jobs practitioner can answer questions like: “what will cause a customer to switch to this product?” or “if a company gets a customer to buy product A, how hard will it be to get the customer to buy product B.” Investors must be predictive to win, and Jobs is a framework designed to be more predictive than logic or a model. In this piece, I’ll pick apart a possible investment and apply the Jobs framework to an investment decision.
During my years in the hedge fund business, I heard thousands of equity pitches. The data-backed ones, the dreamy ones, the value ones, and the miracle ones and I can tell you that no one pitches a stock like Scott Galloway. I admire his confidence and his stunning use of language. He is brilliant, witty and he knows it. In a recent podcast on his show Pivot with Kara Swisher, he expounded on his two biggest public stock positions in Lemonade and Airbnb. Both sounded interesting and I committed to doing a little work. After all, this is the guy who wrote the book The Big Four in the early 2010s foretelling the seismic importance of Netflix, Amazon, Google, and Facebook.
I started with Lemonade. I must admit that even seasoned investors have internal biases, and in this case, I was genuinely excited to dig into Lemonade. I thought something was there and I was LOOKING for justification to buy, which is not a good practice. I bought renters insurance from Lemonade in April 2021 and the experience was magical. It was easy to do, easy to understand and it took a shockingly short amount of time. The design was both beautiful and practical, all completed through a chatbot. I bought a small starter position in the stock and dug in.
What's the bet? The key question in any investment.
Whenever I look at an investment, I try to understand what I’m betting on. Sometimes it’s a market (organic foods), sometimes a CEO (Elon Musk), sometimes a strategy (consolidation) and, occasionally it’s just a macro thesis (interest rates going up). After listening to the Lemonade CEO in a few interviews, reading conference calls, and reviewing their most recent annual report, the bet was clear. Lemonade plans on acquiring renter’s insurance customers and then will serve the customer’s other insurance needs throughout their life. It was logical. Renter's insurance was a low-margin and unattractive part of the market for incumbent insurers. Most of Lemonade’s renter’s insurance customers were young people buying insurance for the first time. Lemonade would impress the renter with their product and service and then, once they have their trust, they would bundle and upgrade them to other more lucrative lines of insurance like pet, home, car, and life. From their annual report:
Acquiring customers in insurance is very expensive (one of the most expensive keywords in Google) and, the logic goes, if they can become the leader in renter’s insurance, they can lower their acquisition costs in their other lines, giving them an advantage. The insurance business requires tremendous scale, and this low-end strategy might be a great way to wedge into a massive market. The CEO of Lemonade, Daniel Schreiber makes some salient arguments for why Lemonade will work. In addition to the above key bet, Daniel explains that Lemonade will be able to underwrite with higher predictability than incumbents using better data and AI. They will donate excess premiums to charity to align incentives. They will use tech to lower overhead costs. They use behavioral science to minimize fraud. For example, they ask customers to record a video explaining their claim. This is based on research that shows that people are less likely to lie when looking into a mirror. Together a clear thesis can be built. This is all exciting but none of it matters if they can’t get the customer to move from renter’s to other higher-level lines at a reasonable cost at scale, so that’s the bet.
Logic doesn't always work in investing.
To figure this out, the most expedient option is to talk to customers using the Jobs framework and techniques, not just relying on logic. Logic can break down quickly in the face of human emotion and the subconscious.
I recruited people who, at some point, bought renter’s insurance from Lemonade and after they had the renter’s insurance bought one or more types of insurance from Lemonade or elsewhere. I used Jobs interviews to understand how they decided to buy other types of insurance after having bought renter’s insurance. In these calls, I found two jobs and I discovered how people switch between the jobs which is the key to understanding the Lemonade bet. Here are the Jobs summaries:
The Insurance Job Summary:
Job 1: Renter’s Insurance:
When I don’t have a lot of valuable possessions, when my landlord requires me to have it, help me get this apartment and make this as seamless and cheap as possible. My anxiety is about how much of my time this process will take.
Job 2: Home/ Car/ Pet/ Life
When I acquire something of value, when I could have large liabilities if things go wrong, when it would really hurt financially to replace these items, help me ensure me and my family’s lifestyle, help me lower my worry about things going wrong in the future. My anxiety is about whether I am covered in various situations.
These jobs are rather intuitive but what might be less intuitive and the focus of the interviews was how customers switch from Job 1 to Job 2. If an insurer does Job 1 well, will a customer believe they will do Job 2 well and upgrade easily?
In every case, the customer started the insurance search process over again.
While both Job 1 and Job 2 require insurance solutions, Job 1 is really about getting an apartment so when the customer moves to Job 2 they consider Lemonade as just one of the players. Of course, being in the consideration set will help but not to the extent the CEO predicts. I think loyalty will prove to be shockingly low for a company with such a high NPS relative to its competition. Why? The context in each job has no overlap at all. One Lemonade renter’s insurance customer explains:
Honestly, I didn’t even look [at Lemonade for car insurance]. I felt like car insurance was more, like, important to me than renter’s insurance was. [For] renter’s insurance I would take anybody. I didn’t really care if I had it. Car insurance I felt like it was more likely that I’m gunna possibly need it and I felt like State Farm was more reputable. - Ed
After a lot of initial excitement, I now believe that Lemonade has a big problem. The highly logical and believable thesis that the CEO is repeating to investors has a big crack in it. Customers may not be behaving as expected and the company is in a critical situation. While they have $1 billion on their balance sheet, their losses are substantial. At current EBITDA loss rates, some analysts think they will run out of money within two years.
Based on my interviews, the customers who did choose Lemonade for Job 2 services did so only when it was cheaper – a lot cheaper. They loved the interface and the ease of use they experience when buying renter’s insurance but that didn’t matter when buying in the context of Job 2. The high NPS that was created through the ease and pleasure of using a chatbot to purchase renter’s insurance was not part of the consideration.
To combat this critical error in understanding how people switch between jobs, I believe that Lemonade has been selling policies at a steep discount to keep sales high. Lemonade is not just a little cheaper. Customers I interviewed recalled prices significantly below competitors.
My policy [for renters insurance] is now $17 a month and previously others charged $50… for the same coverage… [For car insurance] I was payin’ $89 dollars a month [with Safe Auto] and with Lemonade it was $41 a month… and with Lemonade, I also get rental car insurance. I was getting ripped off! -Candice
It is unlikely that Lemonade has built such a large data or AI advantage in Job 2 that would enable them to underwrite this much better. Lemonade could be buying sales (discounting to drive numbers up) while they figure out a strategic pivot. Buying sales could trick investors for a short period of time giving the company a chance to raise more capital or design a solution. I called a friend in the pet insurance business to inquire. They estimated that Lemonade is currently paying 5x market prices for customers. I sold my starter position in Lemonade after the first customer call at a small loss.
Lemonade could be built on misuse of disruption theory
Lemonade’s strategy, from infancy, was built upon HBRs Clayton Christensen’s Disruption theory. Disruption Theory states that disruption happens from the low end of the market and Daniel assumed that renter’s insurance is the low-end of insurance. (HBR wrote a great article about how Disruption Theory is being misused.) Daniel argues that because only 41% of US renters have renters’ insurance, Lemonade is going after non-consumption, a key tenant of Disruption Theory. I tend to think there is an important nuance that could be missing.
According to the theory, non-consumption occurs when someone wants something but can’t get it. Netflix mailing DVDs that were not available in a local Blockbuster store was clearly non-consumption. People wanted these videos, and it would have been prohibitively expensive or cumbersome to obtain them. In the case of Lemonade, I don’t believe that 59% of the population wanted renter’s insurance but couldn’t get or afford it. It is likely that Lemonade did make renter’s insurance more affordable and perhaps there was some small portion of people that this helped, but everyone else could get it, they just didn’t care if they were covered. There was not a lot of non-consumption at the low end of insurance making the basis for the original thesis erroneous. To clarify, all businesses don’t have to be disruptive to be successful- they clearly don’t. But building a business with disruption as a core thesis could result in poor strategic decisions, like expanding into new more expensive lines too quickly.
Lemonade could still work but there is a lot of risk in their strategy
The brilliant team at Lemonade has built a remarkable business and their strategy makes logical sense. But executing a handful of Jobs interviews shows that there might be more going on under the logical surface. Based on this deeper look, I think there is a lot of risk in the current strategy as they try to very quickly bridge the gap between Job 1 and Job 2 while incorrectly assuming they are taking advantage of non-consumption. The Jobs research tells me that customer acquisition costs may remain very high and loss ratios may prove painful as well. I suspect there is a high likelihood that they are either going to need more money or will be acquired in distress.
At the same time, based on my initial work, I think there are some marketing and product strategies that Lemonade should be trying with high urgency that could give their business a better chance of success.