Over the past thirty years Agency Consulting Group, Inc. has noticed that high performance agencies inevitably maintain controllable customer retention rates of 95% or more regardless of the market conditions, regardless of the insurance economy and regardless of competition. And these high retention levels at these successful, profitable agencies are not accidental.
First, let’s define retention. Retention is the result on the feature being measured (Premium, Commission, Customers, Policies) – over time – eliminating the impact of new business. The simplest explanation of retention is through the following formula:
((Current Period)- (New Business))
(Prior Period Total)
A percentage of agents still use Year-To-Date measurements to calculate retention. Since retention is rarely accurate on a one-month basis, an agency’s retention measured on a YTD basis monthly will slowly become more accurate until by the third or fourth quarter, it doesn’t move much and is accurate.
A better measurement of retention is based on a Rolling 12 month basis, easily achievable with most current versions of agency management software. Measuring retention on a Rolling 12 month basis gives you a full year view each month and adds a new dimension to our metrics, trending. If your retention is trending up (a little higher each month on a Rolling 12 month basis), that’s good. Trends in the other direction can give you a ‘heads up’ that something is amiss long before you see the impact on your growth, revenue or bottom line.
The retention definition works on Premium, Commission, Customers and Policies. And the difference in retention between Premium and Commission or between Customers and Policies raises ‘Red Flags’ that require further study. The application of this formula judges the value of Premium and Commission including the effects of rates, growth or shrinkage in existing clients’ sizes, audits and negotiated renewals. On the Policy level, the retention formula can be colored by conversion from mono-line policies to package policies. However, Customer retention is pure (except for the rare instance of a merger of two customers). Using this formula on customer retention identifies your Churn (the average number of customers you must replace each year due to lost business).
The most effective agencies in the U.S. spend a great deal of time, effort and money to reduce the Churn to a minimum. It’s done for two reasons:
- In almost every situation, it is easier and less expensive to keep a customer than to
get a new one.
- The value of a customer in pro-forma dollars grows geometrically, rather than
mathematically (this means that, actuarially, the longer a customer stays, the longer he is expected to stay into the future).
Most agencies are too busy ‘cutting the trees’ to ‘survey the forest’. They feel that they are so busy servicing, administering and selling that they lack the time to calculate the acquisition cost of a customer. But consider that the average closing rates of proposals to new business is 33%, that it takes an average of three to four sales calls (some dead ends, others requiring follow-up calls) to achieve a proposal and that (excluding referrals) it takes from five to ten prospects to mature a sales call. With these statistics in mind, the average of $1,900 of total agency cost for each medium-to-large commercial account sale may be astonishing, but is not unbelievable. These calculations include lost opportunity costs associated with the wasted activities in the pursuit of the 90 contacts needed to convert one good size account.
If your customer retention rate is already above 95%, your goal is to decrease the sales ratios by selective marketing and sales training. But if you have customer retention levels below 90%, putting your time, effort and money into new business is like pouring wine into a barrel whose bung is missing.
The second reality understood by high performance agencies has to do with the long term value of a customer. A new customer, similar to a single policy customer, is at greater risk of loss to the agency than a long term customer. After all, a customer you just solicited and sold was solicited by other agents, including his old agent. You selling the account doesn’t, in itself, generate loyalty to you. However, an account with you for ten years has found strengths in your relationship that will cause it to stay with you longer as long as you treat the customer ‘right’.
High performance agents actually calculate the long term value of a client. If a client is an existing and viable business as opposed to a start-up, it is not unusual for that business to remain intact for ten or more years. The ‘Ten Year Mark’ becomes the target of high performance agencies for successful account retention. If the account remains less than ten years it has not met expectations and an analysis of the loss is done. Ten years is the desired retention term. Accounts with the agency longer than ten years are providing bonuses to the agency. So the high performance agent multiplies the annual commission income of each account by ten to ascertain its long term value to the agency.
The reason they look at long term value of clients is to rationalize the need and desire to place time, effort and resources in communications programs to assure that existing customers are contacted a sufficient number of times in appropriate ways by whatever level of employee necessary to keep them happy and satisfied with the agency.
The communications programs differ by client but are closely monitored and priced out. By comparing the long term value of the customers against the cost of the communications programs, you will quickly realize what you can afford to do for each customer in question. However, the application of this process always results in substantially intensified retention programs. The short term goals are set in terms of increased percentage retention. The long term goals calculate the value of each fraction of a percent of retention as a pro forma dollar amount to the agency. The result of this effort is more satisfied accounts, higher retention and more profit.