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.

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?

4. “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.

5. 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 21^st century.