One of the things I see all the time when it comes to agency marketing and agency health is a reliance on the blanket retention rate. A high retention rate is good, while a low retention rate is bad.
Some agencies understand they will have a low retention rate due to their clientele and modified their business plans and pricing accordingly.
However, the vast majority of agencies will live or die based on their retention rates.
While speaking to a particular agency, I asked, "What is your retention rate?" They proudly stated, "Roughly 85 percent."
Never mind that the principal did not know the exact number (a carrier offered his retention of their customers), a retention rate of 85 percent is a decent number.
However, this retention rate is misleading the agent into thinking all is well with his agency. When I asked a few more questions looking at a three-year sample of the agency, the following picture unfolded.
The Big Picture
In the first year of our analysis, the agency added 1,250 new customers to their existing 3,900 customers and had an overall retention rate of 85 percent for the year. Therefore, they lost 773 customers and started the second year of our analysis with 4,376 customers.
In the second year, the agency acquired 2,000 more customers, and with the same retention rate, they lost 956 customers in that year for 5,420 retained customers.
The third year saw limited growth, and the agency gained only 1,000 new customers. While the agency's retention rate stayed the same at 85 percent, they lost 936 customers, almost a net loss for the year.
While the agency's retention rate stayed the same at 85 percent, they lost almost as many customers as they gained.
Just Breaking Even
As you can see from the numbers above, even though the retention rate stayed the same, the more customers the agency secured the more policies they lost until they were at a statistical breakeven.
At that point, for the agency to grow they needed to get more customers or improve their retention rate. I suggested they can do both.
To complicate their situation, a blanket retention rate does not tell the story of which policies cancelled. Was it the policies sold in the first year or the third year? First year policies might indicate poor long-term customer retention. Third year policies might indicate a failure with your new customer follow-up initiatives.
To help your agency better understand your customers, I recommend that you use the following metrics instead of a blanket retention rate.
Time as Customer
This one is simple. What is the average time that a customer stays with your agency? Using Excel, input a list of your customers, their purchase date and their cancellation date. If they have yet to cancel, assume today's date. Then calculate how long they were or have been a customer. Then determine the average across all of your customers.
Time as customer will give you an indicator of how your agency is retaining customers over the long term. Your average time as customer should always be increasing. If it becomes static or decreases, this is an indicator that something is wrong.
Retention Rate by Acquisition Period
This will require a bit more work. You will need to calculate your customer retention by the year you acquired them. This allows you to determine how you handle customers based on when they purchased and the duration they have been with you.
To help you out, I created an Excel document (download below) that allows you to import just customer name, purchase date and cancellation date (if applicable). Once done the report will show you your agency's average length of customer, overall retention rate, and breakdown of retention rate by year, month and customer.
In the example above, you can see that the agency's average customer is 1.5 years. While the retention rate in 2013 is 99.41 percent, the past five year retention rate is closer to 63 percent. This indicates that the agency should make extra effort to customers that have been with the agency for more than a year.
An additional area to investigate would be 2009. What caused the higher than normal increase of new customers. Why do the customers in 2009 have a horrible retention rate? Do the two correlate somehow?
As you can see, the possibilities are endless when you take the time to understand the data that is available to you within your rating, agency management system, or contact management software. By taking a few moments to analyze your data, you can determine what direction your marketing will need to take. Should you create an email marketing campaign to your long-term customers? What about improving your follow-up marketing to prospective customers?
Should you need help with your internet marketing, feel free to request a consultation to see how ITC's Internet-based insurance agency marketing services can help your agency.
The following download is provided AS-IS and ITC does not support nor warranty any usage of this document.
Excel Document - Year by Year Retention Report
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