What GEICO's Customer Acquisition And Associated Costs Taught Sanjay BakshiVW Staff
What GEICO's Customer Acquisition And Associated Costs Taught Me About Business Economics, Management Quality, And Valuation via Sanjay Bakshi here and here
I read this gem from a Warren Buffett letter:
“In 1999, we will again increase our marketing budget, spending at least $190 million. In fact, there is no limit to what Berkshire is willing to invest in GEICO’s new-business activity, as long as we can concurrently build the infrastructure the company needs to properly serve its policyholders.
Because of the first-year costs, companies that are concerned about quarterly or annual earnings would shy from similar investments, no matter how intelligent these might be in terms of building long-term value. Our calculus is different: We simply measure whether we are creating more than a dollar of value per dollar spent — and if that calculation is favorable, the more dollars we spend the happier I am.”1 [Emphasis mine]
Mr Buffett was writing about how he thinks about decisions relating to customer acquisition costs for GEICO. But, were there wider implications of what he wrote?
I already knew how Mr. Buffett thinks about capital allocation decisions generally. In his owner-related business principle2 # 6, he states:
“Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.”