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Clients for Life: Customer Retention

Customer retention has been trending negatively for the last ten years. Customer retention in recent years has averaged 87% and, while a few percent retention loss doesn’t seem like much, consider the following: If you have 1000 clients, the difference between the 94% retention of the best agencies and the 85% retention of the typical agency is 90 CLIENTS (about 7.5 customers every month)!

A nasty trend has been occurring in recent years in independent agencies. As most readers know, Agency Consulting Group, Inc. has collected annual data from several thousand agencies each year for 20 years in its Benchmarking study. Over the past 60 years, the average retention of clients (as differing from retention of premium and/or commission) by our and other industry standards has been about 90%, some years more and others less depending on the hard and soft market conditions.

While we haven’t been able to “drill down” the statistics sufficiently to prove the next statistic, we project that about ½ of the retention loss (about 5% per year) is uncontrollable. These losses are due to death, clients moving away, and businesses or personal property being sold or closed. Historically, the other 5% has been controllable loss due to the departure of clients due to price, service issues and the sales process of alternative providers (i.e. national advertising by direct writers).

I’m sorry to admit that while the premium and commission retention continues to fluctuate around 90% due to rate creep, the customer retention has been trending negatively for the last ten years. Customer retention in recent years has averaged 87% and, while a few percent retention loss doesn’t seem like much. Consider the following: If you have 1000 clients, the difference between the 94% retention of the best agencies and the 85% retention of the average agency (combining to that 87% in the total) is 90 CLIENTS (about 7.5 customers every month)!

A simple question – HOW LONG DOES IT TAKE YOU TO GENERATE 90 NEW CLIENTS IN A YEAR? This is akin to “Tax Freedom Day” the day of the year that you stop working for your Uncle Sam and begin keeping your money (April 26 in 2006, 3 days later than in 2005, by the way – according to the Tax Foundation). In both cases, you are working to “tread water”, one in your agency and one in your personal life.

But the scary part is that we’re talking about here. That means that half of the agencies have a retention rate below 87%!!

How do you define Customer Retention? The simplest method is to determine the number of customers you have as of 12/31 and reduce that number by the lost customers each month until 12/31 the following year DISREGARDING THE ADDITION OF NEW CUSTOMERS DURING THAT PERIOD. It basically answers the question, “If you could not write any new customers during the year, how many of your pre-existing customers would you have left at the end of the year?” Another method available to agencies with accurate agency management systems is to perform the following calculation at the end of every month:

Total Customers - NB YTD
------------------------ = YTD Retention
TC PRIOR YTD

TC = Total # of New Customers at month end
NBYTD =Total of New Business Customer Year to Date
TC Prior YTD= Total of New Customers Prior Year to Date

This will give you a YTD look at retention each month. An even more accurate retention formula that test a full year of data every month is:

Total Customer - NB Rolling 12 Month Rolling
------------------------------------ = 12 Month
TC Prior YTD Retention

This will give you a full annual retention percentage each month and changes mean that the retention trend is increasing or reducing for full year periods.

Now that we know how to measure retention, the key is whether you’re watching the progression of a disease or monitoring the improvement in your agency’s health.

I don’t recommend your monitoring retention if you’re not doing anything active to improve it. Why torture yourself if you are not changing your agency’s systems to improve the problem? Too many agents think that if it gets bad enough they will finally be forced to do something about it.

Unfortunately, changing retention is like turning the Titanic. You may see the iceberg heading in your direction, but by the time you panic, it’s way too late to make the corrections needed to save the ship.

Maximizing retention in most agencies requires changes in the way the agency does business. We can tell this by watching the agencies who’s retention rates are well above average and determining what they do that most other agents don’t do.

1. They return phone calls. Returning phone calls becomes a top priority of the agency, regardless of who is calling. Some agencies have a One Hour policy – all calls are returned within an hour, even if its only to tell the client that a response is not yet ready. The customer feels that you are attending to his needs. When calls don’t get returned for several hours (or days – or ever), the customer feels that the call is wasted and that he must continue to call the agency until he gets an answer (because he can’t count on the agency staff responding to the original call). This may not be true. You may be diligently working on an answer to the real problem. But without communications, the client doesn’t know that.

2. They spend quality time paying attention to current customers. The best agencies actually schedule time with each customer based on the customer’s specific desires and needs during the year. This is NOT a renewal call or a sales call. It is to cement and continue building the relationship that causes the customers to ‘not shop’ their insurance. We at Agency Consulting Group, Inc. spend a great deal of time showing agencies how to market to prospects who are being “underserved” by their current agents. Those agents assume that the relationship is strong because it was strong when the client came to the agency. However, in many cases, the clients see their agents (or an agency representative) once a year (at best) and that is only related to selling the renewal. Schedule visits to clients every year and you take a step toward retaining more of them.

3. They provide more service to the client than just the insurance products. Many insurance products for personal accounts and for small and medium commercial accounts are relatively generic. The direct writers are convincing the public that, like life insurance, their buying decision should be based on price and price alone.

4. Value-added services as national, big-box insurance entities. You have the benefit of being able to learn more about risk management, assessment and mediation and provide services to your clients that they can’t get from the ‘bigbox houses”. The best agencies spend their time building relationships around defining and minimizing the Total Cost of Risk. Expand your product and service offerings to provide help to clients and prospects to better define what true risk (beyond just insurance risk) they face as business owners and property owners and help them assuage that risk. Call us (800-779-2430) for more information on systems available to provide value-added services to clients and prospects.

Many agents have been exposed to the Asset Protection Model (APM) of relationship selling. If you have not, simply e-mail me (al@agencyconsulting.com) or call me 800-779-2430 and we’ll be happy to send you a synopsis of the program. Two of the key components of the APM is the delivery of more service than just insurance products in order to prove value beyond insurance cost to the client, and Active Referrals, a method that we teach you to gain a referral from 50% of your customers every year. The APM discards the pricing model for selling insurance. APM agents don’t quote insurance. It concentrates on building relationships with fewer prospects until they “insist” that you be their agent because of all you already do for them that they never encountered before from their agents.

Whether you use the APM or any other form of relationship selling, we can prove that not only does it drive more business to you (80% - 85% closing rate, but over a longer period of time than traditional price-driven strategies) but it also drives the retention rate to 95%, losing only uncontrollable customer losses every year (by the definition found above). Once you convince a prospect that you are not just another siding salesman or that the only thing you’re after is a sale and he realizes all that you bring to him in the services you provide, the customer will cement relationships with you instead of the reverse. Customer loyalty is built from the customer’s feeling that you provide him more services than you cost him and that you are interested only in his best interest. That’s the challenge for today’s agents. We must stop selling price and convince the prospects that we are there for him, not for us.

By the way, one of the required lessons in the APM (or any other relationship selling module) is how to identify and disqualify prospects who are highly unlikely to ever buy from you. You may be there to help the clients, but you are not there to be used without the chance of a client relationship being established.

Reprinted from the PIPELINE, the national newsletter for agency principals, by permission of Agency Consulting Group, Inc., a leading consulting firm for independent agents in the U.S. for more than 20 years. Call 800-779-2430 for information or subscription; e-mail info@agencyconsulting.com; website, www.agencyconsulting.com.