The 3 Keys to Agency Success
A lot of different people from a lot of different backgrounds become insurance agents for a lot of different reasons. Maybe your dad was an insurance agent. Maybe you were attracted to the entrepreneurial nature of running an insurance agency. Maybe you like the idea of being your own boss and having a flexible schedule. Maybe it was the money.
Regardless of the differences in background or personality, insurance agents really all have the same long-term goal for their agency:
- Revenue Growth
- Agency Value (for an eventual sale of the agency)
- And Profitability
Over the years, we have worked with thousands of insurance agents. The most successful agents in the nation and the data we have collected both suggest that your goals as an agent will be met when you systematically focus on 3 things:
- Increasing policyholder retention rates
- Uncovering customer referrals
- Identifying cross-sell opportunities
Let’s analyze the effects each of these drivers has on your agency. After we go through all 3, we will identify the best method for honing in on these factors.
How does focusing on retention help my agency?
For many agents, the most rewarding aspect of working in insurance is the relationship you develop with your clients. You get to know many different people in the community and watch them as their lives progress. However, client relationships are not just a feel-good element of the business.
Insurance, maybe more than any other industry, relies on recurring revenue. It may seem obvious that in order to improve the value of your agency, you must hold on to the revenue you already have coming in consistently. If you’re constantly slipping backwards, you’ll never get any traction. In fact, independent Insurance Agents and Brokers of America identifies customer retention as the single most important factor for determining an agency’s value. This is true for several reasons.
First, it is significantly less expensive to generate revenue from an existing customer than a new one. For the average insurance agent, it costs 7-9 TIMES more to attract a new customer than a retained customer. With retained customers there is no networking, no prospecting, no selling involved - only recurring revenue.
Second, there is a strong correlation between high customer retention rates and sustainable high profits. Think about this: a 5% improvement in your agency’s customer retention can DOUBLE profits over a five-year span. A 5% improvement can result in a 100% increase.
Reducing customer defections by 2% is equivalent to cutting costs by more than 10%. It should be pretty clear that retention is essential for a healthy and valuable book of business.
How does focusing on referrals help my agency?
It isn’t simply enough to hold on to the customers you have, you’ve got to be writing new policies if you want to meet your goals of revenue growth. Advertising and events can be time-consuming and expensive. Online marketing takes skills that can be difficult or time consuming to learn. But talking to your clients is something you should already be doing and that you are comfortable with.
Not only are referrals the easiest leads to come by, they are also the most effective. Over the first-year as a client, a referred customer generates an average of 5 TIMES more revenue than a non-referred customer does. Referred customers also have the lowest acquisition cost of any type of lead.
Human beings are social creatures. We desire and trust the approval of others. When a customer is referred to you by a friend who trusts you, the relationship of trust you have built is already years ahead of a customer you didn’t know before. This relationship allows you to skip the “testing the waters” phases of your relationship and begin selling multiple larger policies.
Referred customers spend more on policies than non-referred customers, but also stick around longer to provide a greater source of recurring revenue. To be specific, a referred customer has an average retention rate of 92% over the first three years. Compare this to 67% for any other marketing source. We already covered why retention is important. Referrals make that step all-the-easier.
How does focusing on cross-selling help my agency?
Italian economist Vilfredo Pareto coined what is called the Pareto Principle, also known as the 80/20 rule. This principle states that 80% of events are made up of 20% of causes, or in business, 80% of sales come from 20% of customers.
That 20% is where agency profitability really begins to build. When you can get a few households to provide most of your sales, you save time and money while expanding your revenue. Think to yourself for a moment, “Would I rather have 1,000 households with 4 policies each, or 4,000 households with 1 policy each?”. I think the answer will be unanimous for all agents. Of course you want fewer people to manage and of course you want those few people to pay you more money.
Cross-sold leads are much more natural to sell than cold leads. They have an 85% close rate. Compare that with the 5% close rate of internet leads.
Not only are cross-sell opportunities great in the short term, but also provide better long-run retention. The retention of a customer increases exponentially with the number of policies that customer holds. A customer with just 1 policy has a 45% probability of cancelling. A customer with 3 policies has a 21% probability of cancelling. A customer with 5 or more policies has only an 11% probability of cancelling.
To sum up:
Customer retention is the key to Agency Value
Client Referrals is the key to Agency Growth
Cross-Selling is the key to both Agency Value and Agency Growth
So, now that we’ve identifies the 3 driving factors to meet your goals as an insurance agency, how do you actually make it happen? What is the best way to grow revenue, build value, and increase profitability? How do you retain customers, get referrals, and identify cross-selling opportunities?
Here is the simple answer: Implement a systematic and consistent program to conduct insurance reviews with your customers.