Customer loyalty and retention primer

By Lynn Thomas

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 do what the average insurance agency does you will have average results. The question is, do you dare to adopt a new paradigm in order to surpass the norm and be 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? costs seven to nine times more for an insurance agency to attract a new customer than to retain one?

...that there is a very strong correlation between high customer retention rates and sustainable high profits?

...that when customers tell you they are satisfied with your agency there is no statistical correlation that says they will subsequently remain with your agency? Mere satisfaction is not enough.

...that referred customers have on average a 25% higher retention rate within the first three years than customers who come from any other source?

...that reducing customer defections by as little as 2% per year is equivalent to cutting costs by over 10%?

...that customer retention--not sales volume, marketshare or being a low cost producer (a la Wal-Mart)--is the only factor that correlates with long-term profitability?

...that a sustained 5% improvement in an insurance agency's customer retention rate can double profits in five years?

If you did not know most of these, then read on. Discover the powerful economics of the emerging world of customer retention and its "big bang" impact on profitability in the insurance industry.

Five key points of customer retention

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 is no longer any gray area. Ninety-nine percent commitment no longer works. In order for an 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.

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.) What this means is 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. Thus, the insurance industry is 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 is your choice.

Customer segmentation--The third key point in customer retention is to recognize that your agency has one customer base that consists of different markets. Some examples could be personal lines, commercial lines and construction. These are three distinct markets whose customers have differing and particular needs.

You need to identify your markets, starting with no more than four categories. After these have been identified, 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?

Since most agencies have not differentiated their clients and thus have a policy of "treating all clients equally," they are spending a majority of time on unprofitable business. This guarantees that staff members remain very busy and produce much activity, but also ensures a flat or only low level of profitability. The "A"s in an average agency receive 20%-30% of that agency's time, effort and resources. Yet, agencies exceeding $100,000 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?

"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. Therefore, "A" customers tend to know other "A"s. "B" customers know "B"s, and "C" customers know "C"s. Therefore, if you want more "A" customers, ask "A"s. If you do not want more "C"s do not ask them for referrals because they will 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!

Additionally, you need to give your salespeople time and opportunities to do low-risk practice asking for referrals. In the life insurance industry this is second nature. Why does it seem so difficult in the property and casualty industry?

Referrals are a key strategy for an agency to have consistently high customer loyalty and retention. I think this has not been well understood because its economic benefits are rarely clearly laid out. So here they are:

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

* Referred customers have the lowest acquisition costs.

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

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, then approximately 50% of them will leave within three years. Fifty percent. That is an expensive way to do business. It is also the norm. We do not want the norm; we want excellence. Their studies further 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 is your job? To uncover ways to "Wow!" your "A" customers and ensure that your agency does it regularly and consistently at key contact points.

Thus, you need to shift your focus from customer satisfaction to customer "Wow!"ing, delighting or astounding. When you do, they return the favor over and over, again and again. 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." Now doesn't that help your focus? After all, isn't that what you really 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? It can and is being done. Welcome to business in the late 1990s! *

The author

Lynn Thomas 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.