Frankly, I’m puzzled. Recently, I spoke at a conference where members who have known each other for many years come together a couple times a year to openly share information about their agencies. I repeatedly heard people wanting to grow their agency, struggling to find a way that would work. Yet, I also heard all of them agree that they weren’t very effective in a way that’s known to work, and is the easiest, most cost effective, and profitable way. What is it? You know: Referrals - especially referrals from your “A” customers.
The Economic Facts on Referrals
- A first-year referred A customer on average will generate five times more revenue than a non-referred customer.
- Referred customers have the lowest acquisition costs.
- A referred customer has an average 92% retention rate during the next two to three years vs. a 67% rate for a customer acquired through another marketing method.
These are powerful economic statements that directly impact your agency’s bottom line. Let’s examine them more closely. First, because referred customers tend to have higher levels of trust and confidence in the agent than non-referred customers do, they’re usually willing to move more of their business than are non-referred customers. These higher levels of trust and confidence stem from the relationship between the new customer and the person who referred them. The three strongest referral relationships are a family member, advisor, or a respected colleague.
Second, why do referred customers generate the lowest acquisition costs? There are a few reasons. The person who refers them is the person who has created the confidence and trust in the agent. The agent did NOT have to create it. The process of building these two valuable intangibles is costly, regardless of whether it’s through personal visits, mailings, or advertising. The chart illustrates another reason. It shows the likelihood that a salesperson will make a sale to four different types of prospects, one being a referred customer.
Likelihood of Making a Sale
- 1 out of 20 unknown prospects
- 1 out of 10 former customers
- 1 out of 6 referred prospects
- 1 out of 4 existing customers (cross-sell)
Except for current customers, referred prospects are statistically the most likely to become customers. That means that they’re the easiest to sell.
Third, why is there a 25% higher retention rate? Because we tend to socialize and know people similar to ourselves, when a current customer is so highly satisfied that he or she refers another person, the referred customer is highly likely to have similar needs and expectations. Thus, a new, referred customer is 25% more likely to become a highly satisfied customer, which will make them easier to retain.
Probably none of these economic facts surprises you. So, why do salespeople continue to seek the most difficult type of prospect to sell? Is it the thrill? Is it the excitement of turning a perfect stranger into a customer? I think the answer lies in the training and the reward system.
As long as you don’t train your salespeople specifically to ask for referrals and reward them more for a referred customer than a non-referred one, they won’t actively seek them. Asking for referrals takes both training and ample time to practice. Most agencies don’t offer their salespeople either. Some of the most profitable agencies I know offer higher commissions to their salespeople to give them incentive to seek new referred customers. Economically, this makes sense. Referred customers generate higher first-year revenues, are the least expensive to acquire, and will stay longer than other customers. Thus, it makes sense to offer salespeople incentives to increase the likelihood that they’ll focus on referrals as their key marketing method.
If you don’t see to it that your salespeople remain focused on referrals, you’re missing one of the most proven techniques for your agency to become highly profitable. It’s your choice. If you allow salespeople to acquire new customers using any marketing method and then compensate them equally for all new customers, you’re making some very expensive tradeoffs. Does it make sense if: (1) their method costs your agency much more to acquire customers, (2) if these customers will generate lower first-year revenues and (3) if they’re less likely to stay for a couple of years? However, the existing mind-set about referrals remains firmly entrenched in the insurance industry. I believe that a majority of agencies would annihilate themselves before they would change. No one disagrees that referrals are a more profitable way to obtain new business. No one! Yet changing this behavior has proven to be difficult. Rather than discuss why, I’ll offer some suggestions on how you can increase your agency’s success with referrals – and thus boost your profitability.
The “Six-Step” Referral Program
These are my top suggestions for an integrated referral program. For those who are daring, implement all of them, and call me for some more!
- Have salespeople ask an A customer for referrals two to three times a year and make this is a non-optional behavior that’s recorded and verified.
- Change your compensation structure to pay higher commissions for a referred A or B customer than for any non-referred customer.
- Reward CSRs and salespeople with bonuses based on the percentage of their A customers who have given referrals that have become customers.
- Train salespeople (and where possible CSRs) specifically on how to ask for referrals. This would include a series of training sessions that would give them opportunities to practice, share their successful and unsuccessful experiences, and become comfortable about continually asking for referrals.
- Make referrals a regular agenda item for your sales meetings. Discuss them. Ask to hear about them. What are the obstacles and how can they be overcome?
- Now here’s the clincher: Track and measure your referral program and tie it to your employees’ performance reviews and compensation.
These six steps will create an integrated referral program that will take your agency to new heights. How do I know? Look around you. No one is doing it, everyone agrees that it’s a great idea - and only habits and comfort zones keep salespeople from doing the obvious. So just do it!!