OTHER PAGE

Customer Retention Q&A

Questions, questions, questions: "Is customer retention important? How do you know? How do we measure it? Is there any measurement that we can perform that tells us if we’re getting better or worse in customer retention? How do we make those numbers grow? How do we know if our efforts are working?"

Keep your clients longer and you will make more money in your agency and enhance its value.

“How do you know?”

Agency value increases with the longevity of its clients as well as with the growth of the client base. Considering the ebb and flow of hard and soft markets within our industry, client growth and retention is even more important to agency value and stability than revenue growth in any short term view because of the vagaries of hard and soft markets. If you keep your clients, the affects of any soft market will turn in your favor as market conditions change (as they have always done over time). Even if you face the revenue shrinkage of a soft market, there is no reason to panic as long as your client retention remains high.

“But how does that make you more money?"

An agency does not live on its revenue; it lives on its revenue less expenses. One of the major “hidden” expenses in an agency is the cost of losing customers and having to replace them before growth can occur. Both the processing and service costs associated with losing clients as well as marketing and acquisition costs associated with replacing lost clients with new ones just to bring the agency to parity come right out of earnings potential. And on-going expenses don’t generally decrease when you lose a customer. That means that lost customers translate to lost earnings for the agency owners.

Conversely, if you retain more customers while continuing to grow your agency, more money drops to the bottom line. Until the tipping point is reached in the number of client transactions each year that a service or admin employee can handle, there are no increased costs to maintaining clients.

You are already expensing the dollars to manage those customers. If you didn’t cross-sell additional products at all, if the clients didn’t refer you to new clients at all and if you didn’t write any new business, but maintained all of your pre-existing customers, the result would be that you would make the same amount of money. But, in fact, existing customers (with whom you have established a positive and on-going relationship) will refer other customers to you.
Strong relationship agencies help their existing clients protect more of their assets as time progresses. This translates into greater revenues generated from your existing clients. Even without the ‘punch’ of new customers from other marketing sources, the effect of your current customers will add net income to the agency every year.

“Why is retention important to agency value?”

The reason retention and longevity increases agency value is because value is determined by projected “future” earnings, not by historical performance. Historical performance is important as an indicator of future performance. But if the principal conditions in an agency that caused its past growth and profitability has changed, the prudent valuer will discount historical trends in the projections of future earnings potential.

In terms of retention, it makes common sense that if one agency’s clients stay with the agency for much longer than the clients of a second agency, even if those agencies are of similar size and have been growing relatively similarly that the first agency will be worth more than the second.

Many agents considering acquisition or projecting their own value look primarily to growth in revenues and profits as primary measures of value. But if growth is caused by extraordinary generation of new business because of poor retention, that growth is more expensive than growth that combines strong retention with new client growth. We know this inherently since the value of non-standard agencies whose markers of value have always been poor retention and high cost growth have always been lower by far than the value of standard agencies. Growth in successful non-standard agencies is sponsored by excellent advertising and marketing, but few have been able to solve the retention problem caused by the transience of its client base. If they did, their values would skyrocket.

“O.K, let’s assume retention is important. How do we measure it?”

The measurement of retention of clients is relatively easy if you can identify two types of clients in your system: new clients to the agency and “lost” clients - whose last policies with the agency have expired. The standard measurement of retention is: (Total YTD – New)/Prior YTD Total.

A second form of measurement is even more important because it identifies the changing agency retention trend on an annual basis. This measurement is (Total Rolling 12 Month – New in the Rolling 12 Month)/ Prior Rolling 12 Month Total.

“Is there any other measurement that we can perform that tells us if we’re getting better or worse in customer retention?”

One of the measurements that most agencies don’t perform on themselves involve the average lifetime of clients. Two things should be measured, the average lifetime of active clients and the average lifetime of “dead” clients. The goal is to increase the average lifetime of each category of clients. The reason is that the average lifetime of current clients are indicators of the future lifetime of those clients. This categorization can’t be applied to any individual client, but it, nevertheless, applies to books of business.

Indications are that once a lifetime average is determined for an agency, the future lives of clients within the agency will double the average agency lifetime to date. While this doesn’t apply to individual clients, it is a good gauge of future value of the book of business represented all of the clients currently active in the agency. The clients in a book of business with an average lifetime of 12 years are expected to remain clients with the agency for a longer time on average going forward than the clients in a book of business with an average lifetime of six years.

What you need to do is identify the average lifetime of clients in both categories every year. The increasing trend of average client lifetimes (both active and dead) will be considered by any valuer (or potential acquirer) as an increased factor for the value of the agency. As a sideline, you will also find your agency’s profit margin is much higher than that of the average agency of your size.

“How can we measure “lifetimes” of clients, either active or dead?”

This measurement is quite simple if your agency management system is fed the original inception date of all policies (which most are). A listing by client and policy of original inception dates will tell you the lifetime (to date) of each policy and each client from that inception date through the current policy year. Average that calculation for all clients (using their oldest policy as the original inception date) will give you your average lifetime. Doing so for “dead clients” will provide you the same data on clients you no longer have.

“How long are clients expected to live?”

All indications are that future lifetime expectations are directly related to historical lifetime of active clients. It is fair to estimate that as your average historical lifetime increases for the book of business that clients will live again as long has the average to date. While this can never be proven empirically (since future lifetimes are always in the future), we have two markers that can be used for empirical measurement purposes.

Average lifetime of current customers – We know that this is accurate. So if a producer leaves and absconds with any part of the book of business, you can certainly lay claim to a projected average future lifetime for each lost client at least as long as the current average lifetime of existing clients. This number is factual for your agency, not a point of conjecture.
Average lifetime of “dead” customers – This provides the minimum lifetime expectation of current customers because it is, in fact, empirical data that applies to your agency in your circumstances, not to general industry averages that takes all areas, all economies and all agency situations in account.

“What’s AVERAGE retention and what causes client loss?”

Historically, agencies will lose up to 5% of customers annually through circumstances outside of the control of the agencies (death, retirement, geographic moves, mergers and sale of businesses, etc). Customer losses beyond 5% are often as the result of controllable issues, primarily pricing and lack of strong relationships and service levels. If you are a “maintenance” agency you will have lower retention and lower average client lifetimes than if you are proactively servicing and maintaining relationships with your clients.

Pricing, the greatest “reason” for client movement is, in actuality, a combination of lack of relationship management and a lack of service. If the client considers your agency valuable, they tend to stay with you, even though your price may not be the lowest. This is demonstrated by the fact that agencies tend to maintain most of their clients and books of business even when they do not have the lowest prices in the market. If you’ve shown the client that you are proactive in the analysis of his insurance program including marketing for coverage and price, he will be less likely to shop himself. If he considers you the professional who is taking care of him instead of the receptacle of his insurance policies until he can find himself a better deal, he will stay with you for a long time. Survey after survey finds insurance buyers ‘crying’ for professionals who can actively manage their insurance program.

Many consumers feel that we “sell” them insurance then pay no further attention to them. To the degree that this concept is correct, we will continue to lose clients to the direct writers whose “mantra” is to ‘cut out the middle man and save money.’ We are that “middle man” and if all insurance is alike and the only consideration is price, everyone would change their insurance every year to the lowest price product available. We know this isn’t done. Why? Because inertia is powerful when pricing doesn’t change much or when there is no other reason to leave or there exists another reason to stay with the current provider.

“O.K, you’ve told us how to measure our retention and average lifetimes of existing and dead customers, but how do we make those numbers grow?”

That answer is also simple in concept and difficult in execution – PAY ATTENTION TO EVERY CUSTOMER! No, of course, you can’t take every personal auto insurance customer out to dinner and personally coach them on their insurance program like you might do with major commercial customers, but every customer deserves the value for his commission dollar. Relationships are always personal but not always with the agency owner or a producer. Every service staff member should be a ‘relationship manager’, responsible for contacting the clients they service several times each year.

That contact may be a visit. But, more likely for lower commission income customers, that contact will be by phone or begun by mail or e-mail. Use your system’s note-taking capability for the employee responsive to the client to enter what occurred at each contact in order to permit you or any other producer or employee the ability to see what has transpired with any account. If you lose customers you will be able to see the track of their relationship to determine if the loss was preventable or out of your control. Pay attention to every controllable loss and plug the gaps in your system. Don’t be concerned with uncontrollable losses. They are a part of life and you can’t be concerned with situations that you could not have influenced.

“How do we know if our efforts are working?”

Begin by communicating with your employees regarding retention and lost customers. Maintain a list of lost clients, share them with your employees and require them to identify the reasons for every loss. If they don’t know or try to give you generic answers like “they found insurance cheaper elsewhere,” demand a deeper response. Most of your customers don’t go shopping independently. They were either displeased with the price of a product and had no interaction with the agency or weren’t aware of the actions that your staff took to manage their account. You should have occasional meetings (no less frequent than monthly) in which a part of the agenda is explaining lost accounts to your (the owner’s) satisfaction.

Like most things in our lives, paying attention to an issue diminishes that issue as a problem. If you concentrate on your customers and measure retention and average lifetime of active and dead clients, you will find your retention growing toward the 95% level and above, the timeline of average lifetimes of both live and dead customers growing, more earnings to you, as owners, and to the agencies and a generally higher agency value when it comes time to perpetuate your business.

Reprinted from the PIPELINE, the national newsletter for agency principals. The PIPELINE is published by Agency Consulting Group, Inc., a leading consulting firm for independent agents in the U.S. for over 20 years. Call 800-779-2430 for information about the content of any of these articles or PIPELINE subscription Information:

E-mail: info@agencyconsulting.com
Website: www.agencyconsulting.com