21st Century Management

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First Magic Number to Achieve High Levels of Profitability

Author LynnThomas , 9/18/2012
by Lynn Thomas

The latest research reveals that the top 20% of your Clients generate 160% of your profits.  On the other hand, the bottom 20% of your Clients can drain up to 80% of your profits.

This finding surprises most people. Long-term profitability is mostly achieved by focusing on your most profitable Clients or the top 20% of your Clients who generate 80% of your business’ revenue. You want them to generate up to 160% of your profits. 

To do so, you need to gather Client intelligence from these top Clients such as why did they initially decide to place their business with your company, why have they stayed, are they willing to refer and cross-buy? These are a few examples of Client intelligence that can drive your sales to consistently yield higher profits.

Most companies make decisions based on anecdotal stories and gut hunches.  But the marketplace and especially the insurance business have changed.  The new rules to generate a consistent profit include using reliable and valid Client intelligence to successfully implement the subjective anecdotal stories and gut hunches.  

Your top 20% of Clients today will be the sources of your company’s future growth over the next five years.  In fact 80% of your company’s future growth will come from them. They are priceless and in order to replicate and duplicate them, you need to understand how they make decisions.  How did they learn about your company? How did they become a top Client with your company and four other questions you must ask to generate the revenue growth?  These are not responses that you can afford to guess at.  So are you willing to change your mindset and have 50% of your top Clients generate over 220% of your profits?  

The research continues to reveal the importance of focusing on the bottom 20% of your Clients.  Let’s think about your bottom 20%.  How much are they costing your business each year to keep them on the books?  Why are they Clients if you do not make a profit with them?  Most businesses do not have unprofitable Clients on their books year after year.  Banks and other businesses would charge higher fees to make their profit.  Other companies would raise their prices to generate profits.  

In reality, your top Clients are subsidizes your bottom 20%.  Have you ever thought of it that way?  The bottom 20% are usually high maintenance and drain employees’ energy and enthusiasm, slow payers, shop frequently, and usually have more claims.  Your top Clients are the easiest to work with, they trust you, they value your advice, etc. 

What would your company be like if you eliminated the bottom 20% that drain your profits? You may want to consider “firing” your bottom 20%.  Let’s be clear, they are draining your profits, up to 80% of your profits.  They are not, and few will ever be, profitable to your company.  So you can increase their premium to make them profitable, tell them you will not renew them unless you write more business since currently they are not profitable, or tell them that you work only with Clients that give you all their business, as that is where you excel. When you have all their business, you can be most effective in eliminating and reducing their risks.  Like dentists, you cannot just have a Client’s upper or lower teeth, just some of their business, but you need to have all of their business.

Let your competitor figure out how to make them profitable. Your best competitor can be running around serving more unprofitable and high maintenance Clients which in turn will give you the additional time to spend with your top Clients to dazzle and delight them.  In turn they will stay for life and be fueling your agency’s growth while everyone is enjoying their work and having more fun!

Seeking Mittens

Author LynnThomas , 8/28/2012
by Lynn Thomas

Recently, I was seeking a warm pair of mittens. A simple purchase and many places to choose.

After I dropped my daughter off at school, I knew some stores might not yet be open, but I went looking.

Walgreens only had gloves, so I continued on to four other stores. One store appeared open with cars in the parking lot and people inside the store. I got out of my car and followed a young man towards the store. A woman inside opened the door for him, as I deduced he was an employee. She said to me, “We will open at 9:30, which is in seven minutes,” and then closed the door in my face. Huh?

I stood there a bit shocked. It was very cold outside, and there I stood, eager to be a customer and one of the people who pay her salary. None of these realities were acknowledged. I felt she was totally indifferent to whether or not I would wait. I wished she had been trained to say something like, “I am so sorry. This man is an employee, and I need to let him in so he can help me and the other employees get the store ready for you and other customers. We do not open for seven more minutes, and unfortunately I cannot let you in. I do hope you will wait, even though it is cold outside. I will be more than happy to help you find what you want when we open.” Nope. And the employee she let in did not say anything to me either.

I am surprised at how many opportunities to Wow! and delight customers and create super-glued relationships with them are either not seized upon, or worse, how often employees communicate indifference to a customer, which is the slippery road to losing them for life.

I used to really like this store, and I told many people about it. It was a Wow! store for me. Great selections, friendly help, good prices, good locations, etc. Now I will never go out of my way to shop there and will definitely never recommend the store to anyone. In fact, I have and will continue to warn people about the possible rudeness of their employees. That manager’s 30-second communication just lost that store about $700 annually. If you multiple $700 times the twenty (or more) people I would have recommended to this store, the total is approximately $14,000 annually of lost business. If you add in the negative word-of-mouth advertising that I spread, they could lose another 10 potential customers, which is another $7,000 lost, for a total of $21,000 annually. And all this does not include the number of people these potential customers might turn away.

This store was my first choice for many purchases. Now it will probably be my last. My rough estimate is that this store just lost a minimum of $210,000 over the next 10 years. That was a very expensive 30-second communication, as each second cost this store $7,000.

If training is viewed as unnecessary or too expensive, the decision to not invest in training is a colossally costly and horrifically uninformed decision based on perception rather than hard numbers and reality. You can quantify bad customer service. It is easy. Most companies do not know how to do it, nor do they understand its powerful economic consequences, and, as a result, they do not seek out professionals to assist them.

The attitude that we do not need to upgrade our “Humanware” on a regular basis is what separates the companies that keep growing, even in difficult economic times, from those that struggle to keep afloat, or worse, do not survive.

Retaining Your Most Profitable Large Clients

Author LynnThomas , 8/14/2012
By Lynn Thomas


The continuing weakness in the economy encourages large Clients to switch insurance companies to gain even minor improvements in cost or service; this will markedly increase the competition for these most profitable Clients.  Any failures to retain these large Clients will result in significant reduction in your company’s revenue and profitability.

It is now harder than ever to replace lost large Clients. With today’s economy exerting more financial pressure on companies than anytime in the past 80 years, the pool of potential large Clients is decreasing due to the high number of mergers, bankruptcies, and acquisitions.

Not only is losing Clients a financial loss, but the average insurance company needs to spends thirteen times more to attract a new Client than to retain one.  This high expense can dramatically reduce your company’s profits even if you manage to replace every lost Client.  

This increased expense means that your profits will be reduced even if a new Client produces similar revenue to that which was produced by the former Client.  However, your company will most likely need multiple new Clients just to generate the same amount of revenue.  However, this is not an apple-to-apple exchange.  Now your company has additional risks on its books, needs to work with additional brokers, has more risks it needs to underwrite, has more renewals to handle, has more Clients who are statistically more likely to leave within the next 24 months, and more Clients who will generate higher loss ratios in the first year than existing Clients.   This is not a financially prudent strategy to operate a profitable insurance company.

Because the lackluster economy is creating fewer large Clients, it is more difficult than ever to replace the ones which have been lost. Even if your company can replace them, it will take four to six years to recoup the high acquisition costs.  After that, your company will need to recoup the higher first year claim costs.  Then your company can start to make a profit.


Increasing Client retention can preserve, or even increase, revenue and profitability by millions of dollars. The best companies in the Insurance industry have a 94%-97% Client retention rate. 

High Client retention rates are known to generate high profits. This economic relationship was first introduced to the business world in the 1989 Harvard Business Review article, “Zero Defects Comes to Service.” The authors cited that a mere 5% improvement in customer retention could boost profits by 25% to 85%.   The importance of Client retention did not escape tops CEOs.  In 2002, The Conference Board, a global organization about management, surveyed global CEOs and asked then to identify their most important challenge.  The hands-down winner was customer loyalty and retention.   This is the issue that most CEOs cited as their biggest concern. 

The wide range of increased profits is based on two factors: Client acquisition costs and how often the sales cycle is repeated. The insurance industry because of its high Client acquisition costs and annual sales cycle will benefit the most from increasing its retention rates.

Thus, if you want higher retention rates, where do you start?  Choose an outside market research firm that has extensive experience working in the property and casualty insurance industry and with Client retention. This industry specific firm will generate two results: First, it will produce the most powerful, reliable, and accurate Client intelligence because it has the knowledge and experience to gather, analyze, and implement the best solutions for Clients. Second, it will uncover the best strategies to generate highly satisfied Clients and thus, will produce the highest possible large Client retention rate for your company. 

You may think any market research firm can write a survey, gather the results, analyze them accurately, implement improvements, and increase retention rates.  Unfortunately, it is not an easy undertaking especially with large and complex Clients. 

We wanted to show you some common and significant errors that we have seen in surveys used by Fortune 100 companies.  If any of these errors are in a survey, the reliability and validity declines significantly.

First, all questions need to be tested to eliminate ambiguity and thus generate valid and reliable results.  Few companies understand the importance of utilizing only tested questions and do not choose to invest the time necessary to test each question and rewrite the questions so they are unambiguous.

Second, most companies do not realize that the order of the questions is vitally important to generating reliable and valid results.  The order can also increase the respondent’s trust level and response rates. The first few questions need to be easy to answer for the respondent to gather momentum and have some time investment in the survey. Then questions that require some thought or analysis will more likely be answered than skipped. The survey needs to have a rhythm to it by alternating between some easy questions and then some more thoughtful ones as well as the format of the questions and the responses.

Third, few companies take the time to select the best response format for each particular question.  Is open-ended, multiple choice, forced rank response format, etc. the best?  Most surveys use mostly closed ended questions since they are the easiest to ask, analyze, present, and also eliminate ambiguity. However, respondents then have no room to explain, qualify, or clarify their answers and thus some respondents write in responses, or do not answer the question. 

Fourth, generally, large Clients have businesses that are much more complex than smaller Clients. This is also true for the large Clients’ interactions, issues, and relationships with your company.  Close-ended questions elicit the least accurate and complete answers for large Clients. There is no place for the finer nuances or distinctions of a situation to be expressed. Many large Clients find many close-ended questions about important complex issues quite frustrating and just skip the rest of the questions. This then reduces the response rate as well as the reliability and validity of the results. 

Fifth, an independent third party will generate results with the highest validity and reliability.  Many Clients do not honestly answer questions asked by internal people.  Why?  Because they are usually concerned that if what they say is negative, the person who caused the problem will learn about it.  Since the Client will most likely continue to work with that person, the possible ensuing unspoken tension in their relationship is simply not worth it.  So, they are more likely to respond with positive comments to questions that are asked by an employee of the company or not at all.

Sixth, there are four questions that Clients need to answer for you to accurately know if a Client is a Client-in-Jeopardy and when the Client will most likely leave.  Then specific, detailed, and actionable questions need to be asked to determine what your company can do to proactively intervene and save the Client. Few companies know that four questions are needed to ascertain the likelihood of a Client leaving, know what the questions are, and what the exact wording of each question has to be.  

Seventh, the questions need to be asked objectively without any leading statements.  For instance, if a question asks: “How enjoyable was your dinner?” it may appear to be objective, but it is not.  It is a leading question, for it implies the dinner was enjoyable.  A more objective alternative way is: “Please rate your experience of your dinner on a scale of “1” to “5” where “1” is Poor and “5” is Excellent.”  This will elicit a more accurate and valid response.

Eighth, the market research company with the most experienced and knowledge about your industry will generate the most valuable and relevant results. Why?  First, the company can ask questions using “industry speak”; this increases the credibility and comfortable level for all Clients, but especially for the large Clients. Second, the questions can be more specific and detailed to uncover truly actionable results that everyone can easily understand and implement. 

Ninth, since the market research company is knowledgeable about the insurance industry, it will interpret Client intelligence more accurately.  For instance, if a Client is upset about his/her relationship with the broker and the underwriter, which one is more important for your company to address to retain the Client?  A market research firm with insurance experience focused on Client retention knows that the relationship with the broker is the most important.  Why?  Because the Client’s relationship with the broker has a very high correlation with the Client’s decision to stay or leave your company, whereas the relationship with the underwriter has a lower correlation with a Client’s decision to stay or leave your company. 

Our Proven Route to Outstanding Success

21st Century Management Consulting has more than 23 years of experience working with over 450 property and casualty insurance companies, agencies, and TPAs to increase their Client retention rates. We know how to address all of the potential problems raised above with precision and generate solid and powerful results.  Our advanced and highly customized Client intelligence gathering methodologies and analysis can unlock insights that are hidden in your Clients.
Our expertise is in eliciting carefully selected intelligence from profitable and complex Clients; this intelligence will enable your company to know if a Client is likely to stay or leave.  This knowledge will also allow you to focus on these Clients which will produce the greatest ROI for your efforts – those for which your extra efforts are likely to make a difference.  We can predict when and why these Clients may leave and provide you with proactive, compelling, and timely strategies to intervene to retain them.

For Clients that are already likely to stay, we will uncover precisely what needs to occur to not only retain them, but to delight them, so they will stay for the foreseeable future, and likely become sources for referrals and cross-selling.  This intelligence will include their “Hot Buttons,” retention and quality scores, their referral and cross-selling potential, a tailored communication plan, and whatever else is important to them.  Our results are very extensive and comprehensive.  Every important issue will be uncovered and addressed to ensure these profitable and complex Clients are retained. 

By utilizing this Client intelligence, your company will more successfully retain your most valuable large Clients, acquire more like them, and consequentially will improve your company’s profitability by millions of dollars.

The Challenge of Achieving Excellence

Author LynnThomas , 8/6/2012
By Lynn Thomas

I read a quote the other day, and it really struck a chord in me.

“Excellence requires some effort. You need to give your people a compelling reason to push beyond their comfort zone.” – Tony Schwartz

If we look at most companies, the above quote rings true. Most companies are average. There is nothing horrible about the company, and conversely nothing truly excellent either. If a company wants to stand out among the crowd, it needs to create “a compelling reason [for its employees] to push beyond their comfort zone”.

If we stop for a moment and think about companies that are known for delivering excellence, FedEx, L.L. Bean, Four Seasons, Disney, etc., what makes them different? Each company has its own recipe for its brand of excellence. They did not copy a competitor or leader. They gave their employees a compelling reason to push beyond their comfort zone. Each of these companies has its own feeling of success. You can literally feel it when you interact with someone at their company.

What are some of your company’s possible recipes for excellence? Your flavor of excellence needs to be a compelling reason for your people to push themselves into the uncomfortable zone. It cannot just be attractive or appealing – it must be compelling! That is a tall order, but these times call for people to create tall orders.

I suggest that you do not generate just one, two, or even three possible recipes for success. What about 20? The more options you have, the greater your chances of success. If you create one option, or only a few options, they are probably what most other companies have already developed. When you push yourselves extra hard and force yourselves to dig deep into your intelligence and creativity to generate 20 possible solutions, the last five or more will probably be truly unique and become the winning recipe.

What is your company’s flavor of excellence? Ask many people to participate in its creation. What does it look like, smell like, sound like, etc.? Make it real, and if possible, make it tangible by creating a written statement of excellence. Be sure you invite all of your employees to participate in this process. As each person stirs the recipe, their participation also increases your company's chances for success. Do not rush this organic process. You and everyone else will know when you have created your company’s success recipes. It will be clear and obvious. Be patient and keep stirring as you add in new ingredients, and delete others along the way, as you reach your company's own unique formula for excellence!

Satisfaction, The Seductive Illusion

Author LynnThomas , 7/24/2012
I heard alarm bells ring inside my head when I read a recent article by J.D. Power and Associates that stated customer satisfaction with property claims increased in 2011 to 833 on a 1,000-point scale. That is roughly 8.3 on a 10-point scale. The photo that accompanied the article showed a woman with a big happy smile. I am assuming this is viewed as good news.

That’s my concern. 60% to 80% of us switch to a competitor even though we are “Very” or “Highly” satisfied with the current company. Satisfaction has no glue.

Based on work I did for AT&T during the time it was breaking into the Baby Bells, they conducted a customer satisfaction study (scale was 1 = Poor, 5 = Excellent). The results showed that 94% of their customers gave the telephone company a rating of 3, 4, or 5, yet the company was losing market share.

We were asked to track individual customers for approximately three years. What we discovered was shocking. Of the customers that gave a rating of 3, 50% stayed and 50% left. So satisfaction alone is needed to be in the game, but it has no staying power. Of those who gave a rating of 4, 85% stayed and 15% left. Of the customers who gave the company a rating of 5, 94% stayed and 6% left.

Subsequent to this study, we discovered that when a Client gave a satisfaction score of 4.7 or higher (which was calculated based on their response to four different questions), the Client was six times more likely to stay, six times more likely to refer, and six times more likely to cross-buy. Those Wow!, delight, superb, “over the top” satisfaction levels are something to cheer about because Clients who give these ratings become your unpaid sales force. Isn’t that what you really want?

For some companies, this is not their strategy, or it seems too high, or they say, “We could never reach that level.” Well, it is possible, it is being done, and it works. It depends on your making a choice to become a truly outstanding company. It is a simple decision and focus – and with that, magic can happen.

Customer service representatives can make very creative excuses.

Author LynnThomas , 6/27/2012
I ordered an item that I needed in five days, and the company assured me I would have it in three days with the method I had chosen for shipping. I still wanted that extra cushion, because sometimes deliveries take longer. I kept the tracking number that was emailed to me just in case.

The item did not arrive in three days. On day five, I opened the email with the tracking number and saw that the item I had ordered had reached a warehouse forty minutes from me on day two. Yesterday, it was scanned as received in a warehouse eight miles from me. This morning it was placed on a truck at 6:07 a.m. for delivery today.

I periodically checked its status throughout the day, wanting to believe that it would be delivered today. I called at 8:45 p.m. and was put on hold for about 10 minutes. The representative told me that their company makes deliveries until 9:00 p.m., it was only 8:45 p.m., and I should call back at 9:00 p.m. if it was not delivered.

“It has been on the truck for about 15 hours with no delivery,” I said, “Do you really think that it will be delivered within the next 15 minutes?”

The representative replied, “Yes.”

I had very deep and serious doubts, but I really had no choice.

At 10:00 p.m., I checked to be sure the package was not left on the doorstep and then called the delivery company again. I also checked the delivery status again and saw that their records had been changed! There was no evidence that the package had ever been on a truck for delivery! A note said, “Emergency Conditions Beyond XXX’s Control.” I was outraged that the company's records had been changed to hide the fact that it was out for delivery and had not been delivered!

After I was put on hold for about 10 minutes, a woman finally answered and said it would be delivered tomorrow. I said, “That was what I was told yesterday and it was not delivered today. Furthermore, your records now do not indicate that it was scheduled for delivery today! I do not appreciate a company that changes its records to hide that it missed a delivery today.” She said nothing.

She then mentioned the Emergency situation. She said it was most likely the snow. I replied, “Today is the warmest day we have had in two weeks. I cannot see where snow would have been a problem.” I offered to drive to the warehouse and pick up the package. She said that was not possible, as the warehouse was closed, so I had to wait until the next day.
Neither of these representatives ever acknowledged my problem or my upset. My feelings toward the company would have been so much more positive if only one had said, “I am sorry that this package was not delivered today, and I can understand that you are upset. Let me see what we can do to make sure that it will get to you tomorrow.” Neither thanked me for my business or acknowledged that I relied on their company’s promises to my detriment. They both seemed indifferent and just kept referring back to their logged notes, which further angered me.
The next morning I saw that my package had been placed on a delivery truck at 1:05 a.m. for delivery that day. I called the company and was on hold for about seven minutes. A more compassionate woman answered and started with, “I am so sorry this has happened to you and I really mean it, and I am not just saying that, I really do.” Wow, what a difference! I felt she was genuinely sincere and cared. She said that she would look at the truck’s historic delivery records to see when it usually delivered in my area and asked me to hold a minute. It was a true minute! She said it would most likely be delivered between 2:05 p.m. and 7:04 p.m. What a breath of fresh air!

These were tools that the first two representatives could have used to give me information about my package, but they did not. They could have been more honest with me and said, “It is 8:45 p.m., and based on the truck’s historic delivery data, the chances are slim that it will be delivered tonight since the latest that truck usually delivers in your area is 7:04 p.m.” I would not have liked that response, but at least she would have been straight with me and the company would have retained more credibility and goodwill.

Maybe the representatives did not want to be honest with me. Maybe their evaluations are based on how long they are on the telephone with a customer, so the longer they spoke with me, the worse it was for them. Maybe they were not as experienced as the last woman and did not know about the truck’s historic delivery data. Maybe the company did not hire the right people or train and monitor them to be certain they were providing their customers with exceptional experiences.

Whatever the reason, it is not my problem. This is the company’s problem. As the customer, I can easily tell when a representative is indifferent. And that indifference is the reason that I and 68% of customers stop doing business with any company. Indifference is the slow strangler of customers’ loyalty.

Teach your service people how to be compassionate. Tell them that they really need to care enough about their customers and place themselves in the customers’ shoes. Reward them when they go the extra mile. Tell them to first apologize and really mean it. If they cannot do all the above and be absolutely delightful every day, then they should find another job.

Why? Because your company cannot afford to hire uncaring and uncompassionate representatives. Each indifferent person slowly strangles your customers’ loyalty, your value proposition, your competitive advantage, the extra hard work you and others have put into the company to make it successful, and ultimately your business’ profits.

Be willing to annually invest in upgrading your “humanware”. It may seem expensive, but the alternative is to have untrained people ineptly and clumsily handling your most valuable assets – your customers! Having untrained people is not a viable or wise choice in today’s market, yet most companies unconsciously make that choice every day.

As a country, we are so used to crappy customer service that it has become the acceptable norm. The alternative is so much smarter and easier. It creates happy and productive employees and happy customers with super-glued relationships to your company. In turn, these customers will reward you by buying more, staying longer, referring more of their friends, and giving you priceless word-of-mouth advertising. In the end, you will have higher and higher profits!

It is a choice. And for those companies that really get it, it is the only viable choice.

The Creature of Habit Principle

Author LynnThomas , 6/18/2012
By Lynn Thomas

We human beings are loyal by nature.

I know that none of us is hoping that our doctor, dentist, or car repair company makes a huge mistake that makes us so mad and we decide to leave. When that happens, we need to use our precious free time to find a replacement. If anything, we hope and pray that everything remains status quo so we do not have to find a replacement. It is hard to find a replacement. Doubt creeps in. Uncertainty looms. We can ask friends and family who they recommend, but they may have different needs and wants, so we do not know for sure if we will be a fit with their professional.

If we could avoid the need to find a replacement, would we do what is necessary? We are creatures of habit. We feel most comfortable when everything stays the way it is. How can this work to your business’ advantage? As human beings, when we stay with any organization for seven years, only 3% of us will leave, ever. So your goal, when a new Client chooses your company, is not only to keep the Client the first year, but also to keep that Client for seven years. This creature of habit principle will easily give you high levels of Client retention.

How do you keep a Client for seven years? The best way is to have a plan that you and your Client have co-created. How often will you meet with your Client? What are their preferred methods of communication? Discuss what will be expected changes over the next seven years, e.g., will their children be going to college, what are their business growth expectations, do they foresee downsizing their house or purchasing a larger building for their business?

The Royal Treatment

Author LynnThomas , 6/7/2012
by Lynn Thomas

I had a mail order catalog in hand and decided to order online rather than call the 800 number.

Online, the company advertised that shipping was free and each top I ordered would cost $3.00 less. I was impressed with the online bennies. I placed my order online, and when I was ready to purchase the tops, they were listed at FULL price and shipping was EXTRA.

I could not locate a way to decline the purchase online, so I called the 800 telephone number. I was furious. Was this a bait and switch? I wanted to win this argument or stop the sale. The woman was exceedingly pleasant. She listened intently to my story and then apologized. I felt much better. I am continually amazed at how an “I’m sorry” deflates my anger.

She had to locate my order, and when she did, she asked me what should be the price of the tops? She trusted me to give her the price. Wow! I told her the $3.00 off cost, and she removed the shipping costs. This all took about 90 seconds. She thanked me very much for my business, patience, and calling the error to her attention. She made my day!

I stopped and thought why did this woman’s actions mean so much to me? First, as a complaining customer, I am usually blamed in some way for the problem. She did not say a word about it being my fault. Second, she asked me for the cost of the tops. She never said that she needed to check on the price; she trusted me. Third, she told me she was removing the shipping costs; she gave me what I was promised online. Fourth, she thanked me for my business, patience, and for calling the error to her attention.

Even one or two of these actions would have had a positive impact on me. But she went further. She heard that I was an unhappy customer, took responsibility, and gave me what I wanted and was initially promised. Having someone respond and cover all these bases is so rare and unusual in today’s world. The powerful lesson is this: when a complaining customer is superbly handled, it will usually create a customer for life.

This company’s catalog arrived today, and I eagerly looked through it to see what else I could purchase. I asked myself, why was I looking to purchase something that before I would have purchased elsewhere? The reason: I was treated royally! When I can choose where to place my business, how I am treated, especially when complaining, is of paramount importance. The Royal Treatment wins over “same old blame me” any day!

The profitable power of cross-selling and up-selling

Author mmcdaniel , 5/25/2012

By Lynn Thomas, J.D.

With all the information that's available on the benefits of account rounding, it's amazing that agencies still have the number of mono-line accounts that they do. It is not economically logical. It costs these agencies money to keep the stand-alone policies on the books for the first four to nine years. Simply put, it is unprofitable business. Yet the pattern persists. Why?

What can be done to change the pattern? How can these agencies increase the revenue per relationship? These are some questions that this article will address.

Let's look at banking for an example of how cross-selling can improve customer retention. If a customer has seven products with your bank, no matter what occurs, he or she will not leave. The most powerful product is a safety deposit box. When I worked in private banking in the 1980s, we knew that a customer who had a safety deposit box with us would not leave the bank. Think about yourself. How often do you move your safety deposit box? Unless going to that bank becomes inconvenient for some reason--for instance, you move--I know the answer is "infrequently."

What insurance product has that same "super glue" power? There may not be such a thing, but I think there are some ancillary services that could make a customer stick. I have not been able to find a parallel number of products and services for the insurance industry, although I would bet it is close to the seven in banking.

The bottom line is you want your clients, especially your most profitable ones, to be so tied to your agency, so intertwined, so involved with your agency, that for them to move their business would consume a lot of time and effort and produce headaches and problems for them. Thus, your goal is to create multiple exit barriers that will make it difficult for them to leave.

Sounds good, but how do you create these barriers? The key method is to cross-sell and up-sell your clients. The more they depend on you for their insurance, the more difficult it is for them to recreate your relationship with another agency. And who has the time to do that anyway? No one has the time to recreate strong relationships anywhere in our lives. Time is on your side. Here are the key ground rules if you are serious and want to play and win this cross-selling and up-selling game.

The 10 ground rules of the cross-selling game

First, you must decide to be a proactive rather than reactive agency. You need to be willing to proactively nurture and manage your relationships with your clients.

Second, make a written cross-selling and up-selling plan and stick with it for a minimum of two to three years.

Third, sales and service people must both be engaged. Cross-selling and up-selling is everyone's job. Everyone's!

Fourth, track and measure results.

Fifth, sales and service people must be given incentives that are meaningful to them. Refer to 1001 Ways to Reward Employees, by Bob Nelson.

Sixth, you must make it fun. Refer to The Fun Factor, by Carolyn Greenwich.

Seventh, do not accept commercial or personal mono-line clients unless they meet your criteria for an "A" or "B" client. (See February 1998 issue of this column.)

Eighth, you must initially create a generic, written relationship management plan for all of your "B" and "C" clients who can become your "A" and "B" clients.

Ninth, the sales and service people need to customize at least two or three of the proactive nurturing activities.

Tenth, the relationship management plan must include specific proactive activities that will create opportunities to sell them additional services and products to become an "A" or "B" client.

Add some rules of your own

To expand on the tenth ground rule, these are some of the proactive nurturing activities that will create selling opportunities. Add some of your own.

* A "Welcome Aboard!" package which will answer many of your clients' questions before they occur welcomes them and proactively accelerates their loyalty process into your agency.

* An annual or biannual review of the client's insurance needs. This is the perfect time to discuss additional needs and can be a relatively easy sale. This has been one of the most formidable competitive advantages I have with many of my clients.

* A handwritten thank-you note. This is a rarity in today's modern computerized world. Many will call to thank you for the note, and this provides an opportunity for the service people to have a discussion about the client's needs.

* Keep a record of critical dates in the clients' lives that could trigger the need for a change in their insurance needs. Proactively call them within two or three weeks of these dates. They will be impressed that you remembered.

* Train the sales and service people to know when to seize the opportunity to tell a client about new products and/or markets that your agency is offering.

* Provide an "on hold" message which tells callers about all the products and services your agency offers. Based on my experience with over 75 agencies, over 60% of your clients are not aware of all of the products and services that your agency offers.

* To ensure that your clients know what your agency offers, regularly send newsletters and mailings which include a list of all those products and services. Repetition is how we remember and is the key to marketing and advertising. Once or twice is not enough. It never will be enough.

Make a commitment to the process and you will be handsomely rewarded. To maximize your response rate, make it easy for clients to respond, and be sure to provide an incentive. Include a fax-back option or an 800 telephone number as well as your e-mail or Web page address. These are becoming essential. For the incentive, offer the first 20 who respond a coupon for a free ice cream at a local ice cream parlor in the summer months, a tour of a building of local interest or delivery of a bouquet of balloons to the children's ward of a nearby hospital.

A long-term commitment

You now have the nuggets of a section from our Customer and Loyalty Retention Boot Camp. You have the basics to start a very focused, thorough and profitable cross-selling and up-selling program. Remember as your embark, this is not a one-day or one-week or one-month effort. This is a long-term commitment to be the best. Create many threads, each representing a product or service that connects your agency and its clients. You cannot have too many. You want to create thick ropes that, for the clients, are too intertwined to sever. In other words, the cost of severing the ties will far exceed the difficulties of working through any problems with your agency.

Be clear and forewarned, though; you must be and stay proactive. Stay on top of this program. The days of being a reactive agency and expecting to grow and become profitable are gone. They are history. Relationships today need to be proactively nurtured and managed to be retained. Retention is the name of the profitable game for the year 2000 and beyond. *

The author

Lynn Thomas, J.D., is president of 21st Century Management Consulting located in Waltham, Massachusetts, a firm specializing in customer loyalty and customer retention with a specialty in the insurance industry. In addition to her consulting work, Thomas has written for numerous publications and has been a speaker at hundreds of conventions. If you want to put into action the ideas in this column and others Thomas has written, attend the Customer Loyalty and Retention Boot Camp on October 29 and 30 in Boston. Call (781) 899-4210 for more information.


Author LynnThomas , 5/3/2012


by Lynn Thomas, JD

In today’s highly competitive marketplace, customer retention is a critical success factor. IIAA’s Best Practices lists it as the single most important factor in enhancing an agency’s value. For many agencies, this single factor alone sets them apart from their competitors, placing them in a world-class category.

Historically, high customer retention rates consistently and positively correlate with high profits. In any industry, the top five companies have a 93%-95% customer retention rate, in contrast to the average customer retention rate within the insurance industry of 84%. This 10% difference between the top agencies and the norm represents a major loss of potential profits. Replacing lost customers with new ones has been an accepted practice. Given the industry’s high customer acquisition costs, this strategy doesn’t make economic sense. It is far cheaper to keep a customer than gain a new one. If you continue to doing what the average insurance agency does, you’ll continue to have average results. The question is, do you dare to adopt a new paradigm in order to surpass the norm and become the best? If so, read on....

Basic facts of customer retention

Do you know that?

  •  the insurance industry has the highest customer acquisition costs of any industry?
  • tit costs seven to nine times more for an insurance agency to attract a new customer than to retain one?  there’s a very strong correlation between high customer retention rates and sustainable high profits?
  •  when customers tell you they’re satisfied with your agency, there’s no statistical correlation that says they will remain with your agency? Mere satisfaction is not enough.
  •  referred customers have on average a 25% higher retention rate within the first three years than customers who come from any other source?
  • reducing customer defections by as little as 2% per year is equivalent to cutting costs by more than 10%?
  • that customer retention – not sales volume, markets hare or being a low cost producer (a la Wal-Mart) –-is the only factor that correlates with long-term profitability?
  • a sustained 5% improvement in your agency’s customer retention rate can double profits in five years?

If you didn’t know most of these facts, then read on. Discover the powerful economics of the emerging world of customer retention and its “big ban” impact on profitability in the insurance industry.

Five key points of customer retention

  1. Commitment--People tell me that I’m a bottom line type of person. So I’ll quickly get to the bottom line of customer retention: either love your customers or you lose them. This requires a 100% passionate commitment to your customers. Period. End of story. There’s no longer any gray area. Ninety-nine percent commitment no longer works. For you agency to remain profitable in this turbulent marketplace, you must focus your efforts on your most profitable customers and retain them, no matter what! Retention of your profitable clients is the most important activity to ensure your agency’s long-term profitability.
  2. Enhances profits--The second key point is that the insurance industry has the highest acquisition costs of any industry. (The next in line are the banking, automobile and travel industries.) This means that insurance agencies pay more to acquire a customer than any other business. On average, they pay seven to nine times more to attract a customer than to retain a customer. Read that last sentence again. This puts the insurance industry in the best position to take advantage of the benefits of higher customer retention rates. Its efforts will yield the largest profitability gain from retaining customers and the greatest pain from losing customers. It’s your choice.
  3. Customer segmentation. The third key point in customer retention is to recognize that your agency has a single customer base that consists of different markets, such as Personal Lines, Commercial Lines, and Construction. These are three distinct markets whose customers have differing and distinct needs.

You need to identify your markets, starting with no more than four categories. After you have identified  these markets, then segment them into “A,” “B,” and “C” customers. The “A” customers are your most profitable; these are the 20% of your customer base who produce 80% of your revenue. Generally, the B”s are 30% of your client base and produce 15% of your revenue, and the “C”s are the 50% who produce 5% of your revenue. Where do you want your staff focusing their efforts?

Because most agencies have not differentiated their clients and thus have a policy of “treating all clients equally,” they’re spending a majority of time on unprofitable business. This guarantees that staff members remain very busy and productive, but also ensures a flat or only low level of profitability. The “A”s in an average agency receive 20%-30% of the agency’s time, effort and resources. However, agencies with $150,000 average income per employee are spending 30%-50% of their time, effort. and resources on these customers. Why do the more profitable agencies do this?

* Your “A” clients are the primary source of your agency’s future growth.

* The constant need for new business requires so much time that it leaves an inadequate amount of     time to “Wow!” existing “A” clients.

* When “A” clients are lost, they tend to be replaced with “C” clients because they are the easiest to acquire.

* Losing an “A” client has five to ten times the impact on profitability as losing a “C” client.

* The most profitable clients are “A”s who renew and refer.

            So where do you want your agency to focus its efforts?

  1. “A” client referrals--The fourth key point stems from the previous one: the most profitable new customers will come from referrals from your existing “A” customers. Why? Generally, we tend to associate with people who are like ourselves. This means that “A” customers tend to know other “A”s. “B” customers know “B”s, and “C” customers know “C”s. Thus, if you want more “A” customers, ask “A”s. If you don’t want more “C”s, don’t ask them for referrals because they’ll refer clients like themselves.

In interviewing many of my clients’ customers, I ask, “How could ABC Agency find five more clients like you?” About one-third of those interviewed immediately respond with, “Ask me, I’ll tell them. They never ask me!” So, ask them!

Also, you need to give your salespeople time and opportunities to do low-risk practice asking for referrals. In Life insurance, this is second nature. Why does it seem so difficult on the Property/Casualty industry?

Referrals are a key strategy for an agency to have consistently high customer loyalty and retention. I believe that most agencies don’t understand this because they’re seldom aware of its economic benefits. So here they are:

* A referred first-year customer generates an average of five times more revenue than a non-referred customer does.

* Referred customers have the lowest acquisition costs.

* A referred customer has an average 92% retention rate over the first three years versus a 67% rate for a customer from any other marketing source.

  1. WOW! power--The fifth and last key point concerns a pervasive myth that when a customer is satisfied, he or she will stay. Wrong! AT&T did a series of studies on the impact of different satisfaction levels on customer retention. What they uncovered was surprising, even startling. If a customer is merely “satisfied,” let’s say a three on a five-point scale, approximately 50% of them will leave within three years. Fifty percent!  That’s an expensive way to do business. It’s also the norm. We don’t want the norm –  we want excellence. The AT&T studies also revealed that when the satisfaction level rose to a “4,” 85% of customers stayed, and when it was a “5,” or “Wow!”ed, 92% remained. The conclusion is that there is no, none, zero, zip correlation between mere customer satisfaction and customer retention. Only when a customer is “Wow!”ed is there a strong and compelling correlation between customer satisfaction and retention.

So what’s your job? To uncover ways to “Wow!” your “A” customers and ensure that your agency does so regularly and consistently at key contact points.

This means that you need to shift your focus from customer satisfaction to customer “Wow!”ing, delighting or astounding. When you do this, they’ll return the favor over and over.. Why? Because those clients that are “highly satisfied” or a “5” on at least a five-point scale are six times more likely to refer a customer, cross-buy and repurchase than a customer who is not “highly satisfied.” Doesn’t that help your focus? After all, isn’t that what you want?

Customer advocates, or champions, who will give your agency positive word-of-mouth advertising, refer more “A”s and keep your retention rates and profitability increasing? Successful agencies can and are doing this. Welcome to business in the 21st century.

Lynn Thomas, JD, is president of 21st Century Management Consulting (Wabam, MA) a firm that focuses on building customer loyalty and customer retention with a specialty in the insurance industry. In addition to her consulting work, Thomas has written for numerous publications and has been a speaker at hundreds of conventions. You can reach her at (781) 899-4210, e-mail:,or visit:

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