Posted on 20 May 09
Today we are speaking with Lynn Thomas, founder of 21st Century Management Consulting based in Waltham, Massachusetts. 21st Century specializes in helping companies and agencies increase Client/employee loyalty and retention as well as providing methodologies to accelerate a firm’s growth rate. As one of only twelve customer retention experts in the country and the only individual with a focus on this as it relates to the insurance industry, Lynn has worked with more than 400 insurance agencies and carriers throughout her 20 years of experience.
In the next couple of months, we will be discussing with Lynn a number of critical issues relating to profitability in order to help companies grow. In this issue, we are highlighting the need to pinpoint profitable Clients and how to retain them.
Annie George (AG): What is the first step an agency should take when looking at its Clients and profitability?
Lynn Thomas (LT): “There are three fundamental questions an organization needs to ask: Who are your most profitable Clients? What do they want? And how to give those Clients what they want profitably? Most agencies tend to look at their largest Clients as being the most profitable and, although there is some correlation between size and profit, it’s not always the case. You can begin with the largest accounts, but that doesn’t mean they are necessarily the most profitable.”
Lynn explains that the top 20% of Clients can generate up to 160% of your profits, while the bottom 20% can drain up to 80% of your profits. “It’s the 80/20 rule that we have discussed for years, so you need to identify who your top 20% are,” says Lynn. Segment these Clients and identify them as your ‘A’ list. “For example, determine which Clients have multiple policies with you, which pay their premiums on time, which have a low loss ratio. You need to apply objective criteria when determining who these ‘A’ list Clients are.”
Once you determine your top Clients, Lynn recommends focusing the majority of your agency’s efforts on them. “Find out what these Clients want. What is important to them? Is it about how a claim is handled, the responsiveness to phone calls, the consistent dialogue you offer, delivery, meeting deadlines? And then give them want they want. Do it in a way that ‘Wows’ them.”
The ‘Wow’ Factor
According to independent studies by Bain & Company and by AT&T, on a satisfaction scale of “1” to “5”, with 3 being “Good”, 50% of those who gave “3” as their level of satisfaction left a company after two to three years. Sixty to 80% of Clients that leave organizations are “Satisfied” or “Highly Satisfied,” explains Lynn. “When the rate of satisfaction rises to 4.7 to 5 on the scale, Clients become six times more likely to stay, six times more likely to refer, and six times more likely cross-buy. This illustrates a key point: Only when a Client is truly “Wowed” does Client retention significantly increase and stay at the higher level.
“It’s about having passion in keeping these Clients, in being committed to remaining proactive with them. And it also involves looking at every decision you make and how it will affect your profitable Clients. Whether it’s introducing a new niche or product in the agency, taking on a new carrier, etc., look at how your decisions affect your profitable Clients.”
AG: You have written about the need to create positive experiences with your Clients; can you expand on this?
LT: “When a Client has a positive experience, he or she will share the experience with three to four people. On the flip side, on average a person who has a negative experience will tell 11 people. A person needs to then hear five positive comments to overcome the power of a negative one…this means that for every single negative event, it takes 55 positive comments to overcome it. It’s obvious then that you can’t afford a negative event. You must be ‘absolutely delightful everyday.”’
Retention of top-tier Clients is a proven strategy to ensure long-term profitability. “If an agency is keeping 90% of its top 20% of Clients, that agency will have a great year every year.”
Furthermore, the insurance industry has the highest Client acquisition cost of any industry; the average insurance agency will spend 13 times more to obtain a new Client than to keep a current one. “There is a lot to gain by keeping existing Clients. If Client retention increases five percent in two to three years, the average agency’s profitability will go up 35% to 80%,” says Lynn. “It’s a significant multiplying effect and reflects the powerful economics of retention.”
Lynn says it’s necessary to make the process of buying insurance a positive experience. “Call your Clients, ask the probing questions, and interview them on the telephone to make sure they are happy. On-line surveys have become old hat; your top Clients deserve high touch and customization and thus interviewing them by telephone or in-person creates a big Wow for them.”
“It doesn’t take too much to ‘Wow’ them. Ask your Clients, ‘how can we improve what we are doing for you? Are you getting what you need?’ An ongoing dialogue is key.”
Referrals, Referrals, Referrals
One you have segmented your “A” Clients and have focused on retaining them, it’s time to ask these Clients for referrals.
AG: Isn’t asking for referrals an integral component of the sales or customer service process?
LT: “Unfortunately no. About 45% to 65% of an agency’s top-rated Clients want to provide referrals, but only 31% have been asked. You end up with a lot of low-hanging fruit.”
Lynn explains that an agency needs to look at its book of business, and go after referrals on an ongoing basis. “I have consulted with agencies and have been told that they have asked for referrals. When I ask when, they tell me a few years ago. They need to continuously ask. In this difficult and challenging market, it is illogical to attempt to sell the way agents did five years ago. ‘A’ Clients are going to provide you with ‘A’ referrals, and referred Clients have the lowest acquisition costs. Since the insurance industry has the highest acquisition costs, you need to find ways to lower these costs to increase the price premium. Remind your Clients about the programs you provide, don’t rely on them to visit your website to find out what you provide. You need to tell them and they need to tell their business associates.”
“Insurance agencies can be referral-based, just like physicians,” says Lynn. “Agents identify risks and find ways to eliminate them; they need to promote this value to their Clients and their Clients will in turn serve as an advocate for you. A referral from a profitable Client will have a 92% retention rate versus 67% from any other marketing method.”
Furthermore, about 40% of Clients indicate an interest in additional products. If an agency follows through with cross-selling, 25% will buy within one year. And when a Client has four to five lines of coverage with an agency, it is too difficult to undo the relationship with that agency. “Extra products and services serve as ‘exit barriers’”, says Lynn.
Pay Attention to Red Flags
Lynn also relates the need to keep one’s pulse on warning signs to stem Client loss. “There is a group of Clients that ‘partially leave’ and when the departure process begins many times agencies are not paying attention. For example, perhaps a Client moves his E&O policy to another agency, but keeps the main coverages with the current agent. This is the beginning of the erosion process and should raise a red flag, but most agencies do not have a system to identify these diminishers.”
AG: What do you recommend when a Client begins to move his/her book of business?
LT: “Be willing to ask some uncomfortable but vital questions. Ask, ‘why did you move that piece of business?’ Most Clients are not asked why they have not renewed a small policy, either to avoid confrontation or it doesn’t seem significant enough or isn’t part of the agency culture. Most companies will hear complaints from only 4% of its dissatisfied Clients while 96% will quietly walk away. Again, engage in dialogue and change a negative experience into a positive one.”
About 25% of a book of business partially leaves each year, and these should be red flags. “These partial ‘defectors’ will sneak up on you, they go unnoticed until it’s too late,” says Lynn.
Lynn shares a US World & News Report study, which shows that about 68% of Clients leave due to indifference. “Someone did not care. Caring makes all the difference in the world. It could be that someone doesn’t call back on a quote, or they aren’t listening to their Clients or not asking the probing questions, so the Client leaves.”
“Ultimately changing one’s mindset about being an insurance agent is critical. You bring value every day to your Clients. You just have bought into the negative image of an insurance agent. You are just like doctors, dentists, attorneys and accountants; you deliver advice. We are willing to pay a lot for advice in our society, but not as much to buy insurance products. Start with having pride about what you do, be an advocate for the value you add to one’s life and talk about the good things, the security your products and service provide,” says Lynn.
“To retain your agency’s top Clients is the most important action you can take today to ensure its long-term profitability. Know your top Clients intimately, uncover exactly what they want, customize your services and delivery to accommodate them, ask them for referrals, cross-sales, and notice when any of these vital Clients partially leaves your agency. Passionately care about them and they will reward you manifold. Go and Wow them and have fun along the way!”
A tax attorney by training, prior to founding her firm, Lynn worked for Arthur Andersen and then as a Private Banker at Bank of Boston. She has been a keynote speaker for many top insurance companies’ agents: The St. Paul’s, Selective Insurance, Cincinnati Financial, Utica National, Jewelers Mutual, etc. as well as many top agencies. To learn more about Lynn’s services, please visit: www.21stcenturymgmt.com. You can also contact her at 781.899.4210 or e-mail at: firstname.lastname@example.org.