By Lynn Thomas, J.D.

Frankly, I am puzzled. Recently, I spoke at a conference where members who have known each other for many years come together a couple times a year to openly share information about their agencies. I repeatedly heard people wanting to grow their agency, struggling to find a way that would work. Yet, I also heard all of them agree that they were not very effective in a way which is known to work, and is the easiest, most cost effective and profitable way. What is it? You know, referrals. Especially referrals from your "A" clients.

Here are the economic facts on referrals

1. A first-year referred "A" customer on average will generate five times more revenue than a non-referred customer.

2. Referred customers have the lowest acquisition costs.

3. A referred customer has on average a 92% retention rate over the next two to three years vs. a 67% rate for a customer who is acquired through another marketing method.

These are very powerful economic statements. They directly impact an agency's bottom line. Let's examine them more closely. First, because referred customers tend to have higher levels of trust and confidence in the agent than non-referred customers, they usually are willing to initially move more of their business than are non-referred customers. These higher levels of trust and confidence stem from the relationship between the new customer and the person who referred them. The three strongest referral relationships are a family member, advisor or a respected colleague.

Second, why do referred customers generate the lowest acquisition costs? There are a few reasons. The person who refers them is the person who has created the confidence and trust in the agent. The agent did NOT have to create it. The process of building these two valuable intangibles is very costly, regardless of whether it is accomplished through personal visits, mailings or advertising. The chart illustrates another reason. It shows the likelihood that a salesperson will make a sale to four different types of prospects, one being a referred customer.

Likelihood of Making a Sale

1 out of 20 unknown prospects

1 out of 10 former customers

1 out of 6 referred prospects

1 out of 4 existing customers (cross-sell)

Except for current customers, referred prospects are statistically the most likely to become customers. That means they are the easiest to sell. Easy. Those words are rarely heard in the insurance industry today.

Third, why is there a 25% higher retention rate? Since we tend to socialize and know people similar to ourselves, when a current customer is so highly satisfied that he or she refers another person, the referred customer is very likely to have similar needs and expectations. Thus, this new, referred customer is 25% more likely to become a highly satisfied customer and thus also is likely to be retained.

Probably none of these economic facts surprises you. So I ask, "Why do sales people continue to seek the most difficult type of prospect to sell?" Is it the thrill? Is it the excitement of turning a perfect stranger into a customer? I think the answer lies in the training and the reward system.

As long as sales people are not specifically trained to ask for referrals and are not rewarded more for a referred customer than a non-referred one, they will not actively seek them. Asking for referrals takes both good training and ample time to practice. Most agencies do not offer their sales people either. Some of the most profitable agencies I know offer higher commissions to their sales people to give them incentive to seek new referred customers. Economically, this makes sense. Referred customers generate higher first-year revenues, are the least expensive to acquire and will stay longer than other customers. Thus, it makes sense to offer incentives to sales people to increase the likelihood that they will focus on referrals as their key marketing method.

If you do not see to it that your sales people are very focused on referrals, you are missing one of the most proven techniques for your agency to become a very highly profitable agency. It is your choice. If you allow sales people to acquire new customers using any marketing method and then compensate equally for all new customers, you are making some very expensive tradeoffs. Does it make sense if (1) their method costs your agency much more to acquire them, (2) if they will generate lower first-year revenues and (3) if they are less likely to stay a couple years in the future? Yet the existing mind-set about referrals is very entrenched in the insurance industry. I believe that a majority of agencies would annihilate themselves before they would change. No one disagrees that referrals are a more profitable way to obtain new business. No one. Yet changing the behavior has proven to be difficult. Rather than discuss why, I will give some suggestions on how you could operate your agency to increase its success with referrals and thus profitability.

The "six-step" referral program

These are my top suggestions for an integrated referral program. For those who are daring, implement all and call me for some more!

1. Have sales people ask an "A" client for referrals two to three times a year and make this is a non-optional behavior. This needs to be recorded and verified.

2. Change your compensation structure to pay higher commissions for a referred "A" or "B" client than for any non-referred client.

3. Reward CSRs and sales people with bonuses based on the percentage of their "A" clients who have given referrals that have become clients.

4. Train sales people (and where possible CSRs) specifically in how to ask for referrals. This would include a series of training sessions that would provide an opportunity for them to practice, share their successful and not successful experiences and become comfortable about continually asking for referrals.

5. Make referrals a regular agenda item for your sales meetings. Discuss them. Ask to hear about them. What are the obstacles; how can they be overcome?

6. Now here is the clincher: track and measure all of the above and tie it to your employees' performance reviews and compensation.

These six steps will create an integrated referral program that will take your agency to new heights. How do I know that? Look around. No one is doing it, everyone agrees it is a great idea, it is just habits and comfort zones that keep sales people from doing the obvious. So just do it!*

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 an expertise 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.She can be reached at (781) 899-4210.