The title of this article comes from a popular seminar I’ve given throughout the nation. I’ve asked this question of hundreds of people, mostly agency owners. Between 95 and 99% of audience members have stated that they’re in business to make a profit.
If only that were true! It’s hard to accept that agencies are in business to make a profit when the new Growth and Performance Standards (by the National Alliance Research Academy) shows the average agency makes almost no profit without contingencies. It’s hard to accept that agencies are in business to make a profit when agencies regularly write hundreds of unprofitable accounts and when at least 25% of producers are unprofitable. One fact to remember – because it’s too often forgotten – is that not all sales are profitable.
This is the softest market the Property/Casualty industry has ever experienced. Agencies today are desperate to increase sales to make up for lost premiums. In their desperate search for help, more and more agencies are turning to a myriad of sales and marketing programs
Although some of these programs are good many are not so good. Even if they result in sales, the return on investment is often still negative or, at best, marginal. The agencies that use them make sales, but not profits.
The Problem
Most sales and marketing programs miss a key fact: Not all sales are profitable! Some programs try to address this problem by recommending that agencies avoid small accounts; however, large accounts can be just as unprofitable as small one. Some Web-based marketing programs fail to differentiate between sales and profitable sales – which begs the question of what the agency is getting for its money.
I’ve reviewed and analyzed a number of these programs. Some focus on advertising, which assumes that the services and benefits promised are real. If prospects see this advertising, and the agency using the program offers decent rates, then it should write lots of accounts. However, it will probably lose a lot of money in the process because the fact is that few agencies can live up to the promises advertised. Eventually, the agency will lose its shirt in an errors and omissions (E&O) lawsuit because it’s not offering the services or the quality of services advertised on its Web site.
Agency owners need to understand that, although only a small percentage of people ever paid attention to the hyperbole in paper brochures, Internet advertising never disappears. Search engines can quickly find all the promises an agency has ever made, meaning that the agency facing a complaint stands little chance. How many sales does an agency have to make to cover an E&O claim? When calculating this cost, be sure to include your time, frustration, stress, higher E&O premiums, and damaged reputation.
Another factor to consider is: What makes a prospect’s phone call or e-mail funneled through a web site any better than one funneled through a Yellow Page ad? Is the hit ratio better? Is the retention rate higher? Is the quality of the account better? What is the profitability of accounts generated by Web-based advertising? If you invest heavily in any advertising or marketing without knowing what profit margin to expect, you-re in business to make sales – not profits.
I have asked the question about the difference between Yellow Page call-ins and Web-based call-ins many times. The typical response is outrage, followed by an accusation s of heresy. It’s as though the web is the equivalent of medieval churches whose righteousness could not be challenged. I’m asking a question for which there you should have a solid, factual answer. Otherwise, you’re just making sales – not profits.
Some agencies seeking sales turn to consultants who promise that if the agency invests tens of thousands of dollars, it will increase sales. This is a pointless promise. If an agency invests enough in any sales system, sales will increase—even though the agency goes broke in the process.
One popular program will work in extremely limited situations because it works well with large numbers. Otherwise, the investment in value-added tools beyond the original consulting fees is so high that most agencies will lose money on it. It’s like a doctor telling a patient that the cost for a particular therapy will only be $10,000, which the patient thinks is a good deal. However, if the therapy also requires drugs, and further treatments that cost an additional $100,000, is it still so good?
The worst systems are those with high upfront charges that do not include a SWOT (strengths, weaknesses, opportunities and threats) analysis. This is usually an extra cost for the agency because it will probably have to hire another consultant to complete the analysis. Agency owners should not do the analysis for themselves either – it’s better to use an outside party.
A SWOT analysis is essential because most agencies don’t have the strengths or opportunities to make these sales systems work. Some sales consultants make this problem the agency’s fault and most owners fall for this because they acknowledge that they didn’t push their producers hard enough.
However, this is a false premise. First, if an agency doesn’t have the right people, the system used is meaningless; any system will fail. A huge percentage of people employed as producers have as much chance of becoming successful salespeople as of becoming great surgeons. Unless you deal with this basic fact first, no sales system will work.
An agency must have enough quality accounts available. For a sales system to generate $1,000,000 commission in short order – as some of these systems promise and others require to justify their price – an agency must have access to a large number of quality accounts.
Think about the numbers. Writing $1,000,000 in $1,000 accounts within three years means 1,000 new accounts, or 333 annually, which works out to almost one per day for 36 straight months (including weekends and holidays). Even assuming a great 75% hit ratio, to meet this target will require generating 1,333 proposals. Review your prospect list. Do you have 1,333 quality prospects who can generate at least $1,000 in annual commission income? Does the sales system or consultant have a way to generate this result? Will the consultant or system guarantee it?
Even assuming $2,000 per account, this comes to 500 accounts, or 167 annually, which means 222 prospects a year or 667 total quality prospects. What does your market research show is feasible? Is the consultant even providing this research? Assuming $5,000 per account will require 200 new sales and 267 new prospects. Few agencies can write 200 new, $5,000 commission accounts in 36 months.
Even if the sales program is great, the key question is whether it will work to make sales or profits. Today agency profit margins are in the basement due to the soft market and down economy. Consider a typical 15% profit margin. An agency with $3,000,000 in revenue agency is making $45,000 in annual profit. If it has to spend $100,000 on the system – not to mention potential E&O claims – how much new revenue must the system generate pay for itself?
No matter how much someone is willing to pay, there’s no magic sales pill. Success comes to those agencies that work the hardest and smartest rather than with those who simply spend the most.
The Solution
This solution is basic. The first step is to complete a SWOT analysis to determine what’s feasible and what strategies align the agency’s strengths and opportunities. This includes an honest analysis of the producers’ abilities and management’s discipline in holding themselves and their producers accountable for results. It also includes analyzing the relevant markets and carriers.
This analysis will put the cart after the horse so that any subsequent sales strategy will be going in the right direction. This might mean paying $50,000 for a marketing system or a sales consultant – or, then again, it might not.
Many agencies can make basic, low-cost improvements that will produce a bigger increase.
One solution is to provide the quality service that the agency’s Web site advertises. rather than just paying for the advertising. This usually means doing an annual coverage analysis of every client. If you think that you can’t afford to do this, then make sure you do not advertise it! Sure, your advertising might be then boring, but at least it will only advertise actual services.
Another option is to use a coverage checklist, which offers a variety of benefits. Sales increase, E&O exposures decline, clients get the coverage they need, producers begin focusing on profitable accounts and their clients’ needs, and the quality of the accounts improves because price shoppers won’t sit still for coverage checklists. The best thing about this option is that these checklists are free!
Conclusion
Every agency needs to generate new sales. However, agencies that do a SWOT analysis and impose sales and marketing discipline can grow revenues in a far more cost-effective, less risky way - and make profits, rather than just sales.