ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

Resolving Customer Problems

What’s a customer worth?

You work hard to sell insurance to new customers, we all know that, and that is why we pay for marketing and advertising to prospects, the general public, and for internal marketing to carriers. That is also why we pay producers more for new business (or for growth) than to renew and maintain existing accounts.

Just what is the value of a customer?

Is it the annual commissions from his policy?

Is it the profit after charging expenses to his commission?

And, should all customers be valued the same way?

We propose that the value of a customer to the agency is best represented by his revenue potential over his projected lifetime as your client. That sum can amount to some serious money! Unfortunately, most agents never collect the value of their customers. They undersell the client by not offering the full range of products the client needs, and therefore the client does eventually purchase all of the needed products, from someone else.

Imagine for a moment that you have $1 Million dollars to invest and to earn income. You could simply put that money into a bank savings account and earn a minimal income, you could put the money into a higher income generating bank account, you could invest the money in a variety of ways to earn even more, or you could pay attention to the markets and move the money to gain the strongest earnings while maintaining an acceptable degree of safety. The more you pay attention to your investment, the more it’s worth !!! New clients are your investment in the future of the agency.

A young man with a car and an apartment may only be worth $150-$180 per year in commissions to you now, but add a wife in a few years, a couple of kids a few years thereafter, cars, homes, RV’s, vacation homes, life insurance and, eventually, cars for the kids, and you can easily reach a whopping $60,000 in commission income to you over the work-life of that young man (example available on request). That does not even consider any commercial lines and referral business that may come to you as the result of your relationship.

Does your staff treat every young person asking for an insurance quote as a potential $60,000 client, or do they mistreat him, or even chase him away, because he’s young and has no supporting policies already?

Even if you end up writing his insurance, you can treat that client like the simple savings account in our example, above. Write his auto and tenant policy and never ask for anything else, and it will be a secure $150 for the projected 4-6 year life of a two-policy account, or you could create a relationship that will mature the account as the client needs your services. He will call for coverage if he has a positive relationship with your agency, but not if his relationship with you is transparent. Or, you can become pro-active, contacting the client on a regular basis, creating the need as his condition changes through his career and life.

If you exert the full marketing press to build a relationship with a new client, and if a client does not react to either your reactive or proactive efforts to serve his needs, that client’s value diminishes for your agency. If you attempt to prospect your own client to mature his needs for insurance with you as the default insurance agent, you will certainly grow the lifetime earnings from that client.

This brings us to our second point. ALL CUSTOMERS ARE NOT THE SAME AND SHOULD NOT BE VALUED (or treated) SIMILARLY. A customer should be valued by you if he brings value to you. If you do not prospect your customers for all of their insurance needs, shame on you, but that still means that the client is worth $150 per year. If you prospect regularly, but the client does not react and places insurance coverage elsewhere, shame on him! He has passed up an excellent counselor that could protect his family and his assets throughout his life, but, either way, the client is worth a minimal amount to your agency and cannot be logically treated as you would treat a $60,000 client.

How much service can you afford to give a client?

The best way to answer this is financially. Using Personal Lines as an example, compute the number of transactions generated in the department during a year. Those numbers are available to any agency using a standard agency management system (like AMS, Applied, Ebix, etc). Yes, I know that there are many transactions that do not “hit” the computer, but the total transactions will be a factor of the computer transactions, even if they are actually double the number.

Next take the expense of Personal Lines. Use personnel costs (including benefits) and allocate a percentage of all other administrative costs (i.e. rent, telephone, administrative personnel, management personnel) to this department.

Divide the total Personal Lines expenses by the number of transactions to achieve the cost per transaction in the department. Let’s say you generate $200,000 of Personal Lines commission and $160,000 of expenses on 3000 transactions. Your average cost per computer transaction is $53.33. If you have a $150 revenue customer, you generate a profit as long as you generate one or two transactions for him in a year. If you have labor intensive clients who only provide $150 in annual commissions, your agency can not afford to treat them as well as the lifetime client, whose average annual income to the agency will be $1,364 ($60,000 divided by 44 effective career years). The agencies that will inevitably survive and profit in the marketplace will find more efficient ways of dealing with low margin customers or will eliminate them.

Consider the marketing effort needed to make a new client into a lifetime client. If it works, the client is worth his weight in gold. If it doesn’t work, you are losing in two ways: first, you will lose money on these clients if they are time consuming for the agency, and second, you lose the opportunity income that would have been generated by your staff dealing with Lifetime Clients instead of single policy customers. Most agencies feel that even a $150 per year client is worthwhile. For the most part that is not true. If you are so busy with $150 clients that you cannot effectively service the “Lifetime Clients”, or cannot market to new clients, those $150 clients are draining you, not benefiting your agency.

We have directed this article toward young personal lines clients. We have done so because during my 30+-year career, I have seen many of these youngsters become professionals and business owners. The treatment that they receive when they are 21 years old, looking for their first auto policy, reflects on their attitude toward insurance in general and toward their agent, in particular, when they make insurance decisions later in life. We have not even explored the relationship transfer from personal lines to commercial clients, and the compounded revenue value of those clients. Just let it be noted that every new client should be treated as you would treat a $60,000 commission client. Market to those clients to make them rely on you for ALL of their insurance needs. If you succeed, stick with them, they are your benefactors for the future, but if the clients resist your efforts to become their insurance counselor, consider replacing them with different relationship-based clients.

You know the quality and value you bring to a client relationship. If the client does not treat you, your staff, or your agency as you would expect someone to treat a valuable asset, you are probably better off without him than with him.