Revenue growth for its own sake doesn’t make sense.
In an industry that prizes sales, it’s no wonder that so many sales programs and trade magazines advertise double-digit growth. You’ve probably seen the headlines: “Agency Grows 20% Annually for the Past Five Years! Look Inside and Learn How!” Well, maybe the headlines aren’t quite so loud, but this message does sell.
Readers enticed by these articles often assume that all this growth is based on profitable sales. They easily make this huge leap of faith because the insurance industry is plagued by the myth that all sales are profitable. Many agents believe this is a “cost-plus” industry, in which each sale costs an agency $X dollars and the sales price always exceeds the cost. The urban insurance legend is that every sale has a 10% profit margin, for example; and thus a 10% increase in revenue equals a 10% increase in profit. Nothing could be further from the truth. Unfortunately, our business is far more like Detroit, where the cost of manufacturing a vehicle might exceed the sales price.
Consider new business. Which is more profitable, writing new business or renewals? Is your agency’s new business even profitable in the first year? If not, what happens to profit when you’re writing a lot of new business? Profit margins decrease, proving that marketing insurance is not a cost-plus business.
According to the Growth and Performance Standards published by the Academy of Producer Insurance Studies, the average agency with more than $2,000,000 in commissions has $3,908,000 in revenue, $3,496,000 in expenses, and writes 7,668 accounts. This means that the agency spends $456 per account. How many accounts generating less than $200 in commission does the average agency of this size write? Less than $100 commission? If the average cost per account is $456, how can the $100 Commercial account be profitable?
It’s easy to grow by writing unprofitable accounts; and a lot of sales organizations are more than willing to do so, hoping to score a few big sales to subsidize all of the unprofitable sales. In fact, a study cited by the Wall Street Journal several years ago showed that 61% of salespeople preferred to make a sale even if they lost money on the deal.
If this problem infects your agency, don’t feel like the Lone Ranger. One large broker hired a large number of producers to accomplish fast growth. The idea was that even if none of the producers generated enough sales to be individually profitable, top line revenue would increase substantially. This ignores the reality that if the individual producers weren’t profitable, there’s no way that they would generate profitable growth, collectively. How important is it to grow for the sake of growth, if that growth is unprofitable?
I often ask audiences, “Do you want to make any sale or do you prefer profitable sales?” There’s a huge difference between sales that are profitable and those that aren’t. Because much of the “fantastic” growth touted in our industry is not based on profitable growth, when evaluating a sales program or even reading an article about an agency growing quickly, think in terms of profit. For example, if you learn of an agency growing 15% annually and you find yourself getting that tight feeling in your chest making you want to grow faster too, consider whether that 15% is generating an adequate profit. Look for clues and read carefully to determine what it took to get that 15% growth. I recently worked backwards using the information in a magazine article and discovered that the agency’s rampant growth was powered by a 50% to 75% reduction in commission rates. Is 15% annual growth still appealing at this point?
Fast, unprofitable growth might be appealing for certain strategies, such as loss leaders (tough to do in this industry), driving a competitor out of business, or selling out. However, if these strategies don’t make sense for your agency, you need to distinguish between all growth and profitable growth. This can be a tough challenge — but we must destroy the myth that all insurance sales are profitable. If you’ve learned the difference, you’ll keep making money. If you haven’t, you won’t be around that long.
The bottom line: All growth is not profitable. Many of the sales programs and high growth agencies making the news are not achieving profitable growth. Is your goal to grow at any cost — or to grow profitably? To answer this question, follow these steps:
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Analyze the profitability of business that you plan to write.
Unless you have a specific reason for writing a piece of business at a loss (see above), don’t write it.
Review your entire book and get rid of unprofitable accounts as soon as possible.